Make use of our RBSE Class 12 Accountancy Notes here to secure higher marks in exams.
Rajasthan Board RBSE Class 12 Accountancy Notes Chapter 12 Ethics in Accountancy
Introduction
Ethics or moral philosophy is a branch of philosophy that involves systematizing, defending, and recommending concepts of right and wrong conduct. The term ethics derives from the ancient Greek work Ethikos, which is derived from the word ethos (habit, “custom”). The branch of philosophy axiology comprises the sub branches of Ethics and aesthetics each concerned with values.
As a branch of philosophy, ethics investigates the questions, “What is the best way for people to live?” and “What actioils are rights or wrong in particular circumstances?” In practice ethics seeks to resolve questions of human morality by defining concepts such as good and evil, right and wrong, virtue and vice justice and crime. As a field of intellectual enquiry, moral philosophy also is related to fields of moral psychology, descriptive ethics and value theory. Richard William Paul and Linda Elder : “A set of concepts and principles that guide us in determining what behaviour helps or harms sentient creatures.”
Cambridge Dictionary of Philosophy : States that the word ethics is “Commonly used interchangeably with ‘morality’ and sometimes, it is used more narrowly to mean the moral principles of a particular tradition groups or individual.”
Bernard Williams : Writes attempting to explain moral philosophy “What makes an inquiry a philosophical one is reflective generality and a style of argument that claims to be rationally persuasive and Williams describes the content of this area of inquiry as addressing the very broad question, how one should live.”
Nature of Ethics
- The word “ethics” is connected intrinsically with questions of correct conduct within society.
- Etymologically “ethics” comes from the Greek “ethos” meaning “character” which indicates a concern for virtuous people reliable character and proper conduct.
- Ethics asks what we should do in some circumstances or what we should do as participants in some form of activity or profession.
- Ethics is not limited to the acts of a single person.
- Ethics is also interested in the correct practices of governments, corporations, professionals , and many other groups. Our basic values and the purpose of human society,
- Ethics is sometimes identified with an inflexible set of rules and self righteous moralizing.
- Rules say and action is either right or wrong. This over simplifies ethics.
- Ethics is not static. Ethics consists of dynamic frameworks of principles and values. Our ethical values reflect our deepest convictions and attachments.
- Ethics is the process of inventing new and better ethical responses to problems and conflicts.
- Ethics should focus on how people interpret, apply, balance and modify their principles in light on new facts, new technology, new social attitudes and changing economic and political conditions.
- Ethical thinking requires the guidance of principles but it should not be shackled to them.
Sources of Business Ethics
Ethics in general refers to a system of good and bad moral and immoral, fair and unfair. It is a code of conduct that is supposed to align behaviours within an organisation and the social framework.
But the question that remains is where and when did business ethics come into being. Primarily ethics in business is affected by three sources are culture, religion and laws of the state.
(1) Religion : Religion is the oldest source of ethical inspiration. There are more than ethical inspiration a number of religions which exist across the whole world but all of them are in agreement on the fundamental principles. Every religion gives an expression of what is wrong and right in business and other walks of life.
The principle of reciprocity towards one’ s fellow beings is found in all the religions. Great religions preach the necessity for an orderly social system and emphasize upon social responsibility with an objective to contribute to the general welfare. With these fundamentals every religion creates its own code of conduct.
(2) Culture : Culture is the set of important understandings that members of a community share in common. It consists of a basic set of values, ideas, perceptions, preferences, concept of morality, code of conduct etc. which creates distinctiveness among human groups. When we talk about culture we typically refer to the pattern of development reflected in a society’s pattern of knowledge, ideology, values laws, social norms and day-to-day rituals.
Depending upon the pattern and stage of development, culture differs from society-to-society. Moreover, culture is passed from generation-to-generation. Culture facilitates the generation of commitment to something larger than one’s individual self interest.
(3) Law: The legal system of any country, guide the human behaviour in the society. Whatever ethics the law defines are binding on the society. The society expects the business to abide by the law. Although, it is expected that every business should be law abiding, seldom do the businesses adhere to the rules and regulations.
Law breaking in business is common e.g., tax evasion, hoarding, adulteration, poor quality and high priced products, environment pollution etc.
Ethics in Accountancy
Accounting ethics is primarily a field of applied ethics and is part of business ethics and human ethics the study of moral values and judgements as they apply to accountancy. It is an example of professional ethics.
Accounting introduced by Luca Pacioli and later expanded by government groups, professional organisations and independent companies. Ethics are taught in accounting courses at higher education institutions as well as by companies training accountants and auditors.
Due to the diverse range of accounting services and recent corporate collapses attention has been drawn to ethical standards accepted within the accounting profession. These collapses have resulted in a widespread disregard for the reputation of the accounting profession.
To combat the criticism and prevent fraudulent accounting, various accounting organisations and governments have developed regulations and remedies for improved ethics among the accounting profession.
Window Dressing
“Window dressing is the ct of manipulating the financial statements of an entity so as to show a better financial position and performance than their actual existence. It is a form of creative accounting and while the financial statements may have been prepared in accordance with proper accounting standards there is bias in the way the figures are presented.”
It can be used to hide liquidity problems or to make the financial statements look better to present to lenders of finance or to encourage investors. Some of the common methods of achieving “window dressing” include the following :
- Sale and Leaseback: Sell an asset before the year end and lease it back after the year end. This increases cash but does involve a commitment to pay rentals,
- Short Term Borrowings: Borrowing just before the year end shows a better ability to repay debts although it does increase liabilities.
- Receipt of Receivables : Asking customers to pay their debt early so that cash is received before the year end. Discounts are usually offered to customers so that they will agree to this. This improves the cash position and thus, liquidity but reduces profit.
- Bringing Sales Forward: Asking customers to take sales early so that they can be recognised before the year end. This increases revenue and profit but not cash and the sales could not be recognised again in the following year.
- Changing Depreciation Policies : Extending the useful lives of non-current assets so that the depreciation charge is reduced. This increases profit and the carrying value of non-current assets.
- Changing Valuation Policies: A change in valuation methods will affect profit especially for inventory.
- Recognising Intangible Assets : In this can be done it will improve asset values although if amortised the expenses will reduce profit. If the intangible asset is not amortised then, it will give even higher asset values that may not be true.
“Window dressing” is not an ethical way of preparing financial statements : In preparing financial statements, the prepare must ensure that the information is prepared honestly and fairly and that it can be relied upon by the users of those financial statements. If the financial statements are altered so that they do not present fairly the performance and position of the entity then they may be misleading to users.
Professional Accountant : A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer.
In acting in the public interest a professional accountant should observe and comply with the ethical requirements of this code. Fundamental principles of professional ethics for professional accountants provides a conceptual framework for applying those principles. The conceptual framework provides guidance on fundamental ethical principles.
Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles to evaluate their significance and if such threats are other than clearly insignificant to apply safe guards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised.
Professional Behaviour : The principle of profession behaviour imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes action which a reasonable and informed third party.
Having knowledge of all relevant information would conclude negatively affects the good reputation of the profession. In marketing and promoting themselves and their work professional accountants should not bring the profession into disrepute. Professional accountants should be honest, truthful and should not.
- Make exaggerated claims for the services they are able to offer the qualifications they possess or experience they have gained.
- Make disparaging references or unsubstantiated comparisons to the work of others.