Upholding Integrity: The Crucial Role of Ethical Standards in Accounting

Business leaders, investors, customers, employees, vendors and the public need accurate financial information to make informed decisions about companies they do business with. They depend on ethical accountants to provide this information. Accountants are bound by professional standards that guide their actions and help maintain financial transparency and public trust.¹

Public accounting failures have had devastating impacts on the economy and individuals. As a result, congress has passed laws such as the Sarbanes-Oxley ACT (SOX) designed to protect shareholders and the public. Because the work accountants and auditors do has such high stakes, they have to adhere to prioritize ethics, integrity and objectivity.¹

This article will explore ethical auditing practices, standards and principles in accounting.

Core Ethical Principles in Auditing

Although all accountants are held to high ethical standards, auditors have additional responsibilities and obligations. Auditors verify the work of accountants to ensure a company’s books are accurate and that there is no fraud or subterfuge. The following ethical principles guide the work of auditors:²

Auditor Integrity and Objectivity

For their work to be trusted, auditors must have integrity and objectivity. Integrity involves the accuracy and honesty of financial reporting. Auditors are obligated to avoid reporting financial data that’s false or misleading or avoid correcting information that’s false or misleading.³

Objectivity refers to the need for auditors to remain independent from the work they’re auditing. They must avoid any conflicts of interest. An auditor’s conclusions should be based on professional standards and their own judgment, not personal biases.³

Professional Skepticism

Auditors have to bring an open, questioning mind to their jobs. This professional skepticism involves critically analyzing audit evidence in order to uncover contradictions or inconsistencies. They can’t take evidence at face value. Instead, they need to challenge assumptions and thoroughly investigate transactions.⁴

Confidentiality and Transparency

Auditors are privy to confidential information in the course of doing their jobs. They have an ethical obligation to keep sensitive data confidential and not disclose it to anyone who isn’t authorized to see it. Additionally, they can’t use the information they learn during the course of their audits for personal gain.5

As part of their work, auditors must provide detailed documentation to support their conclusions. This comprehensive documentation leads to a more transparent auditing and review process.⁶

Common Ethical Dilemmas in Auditing

Auditors can work for independent firms or as internal auditors. Internal auditors work for the company they audit, so they’re more likely to run into ethical dilemmas. Internal auditors commonly face the following types of ethical issues in auditing:⁷

Fraud Detection vs. Corporate Loyalty

If internal auditors discover fraud, they may be conflicted about reporting it. Because they’re employed by the companies they audit, they may face losing their job if they report fraudulent activity to the appropriate governing bodies.⁷

Conflicts of Interest

Independence is one of the core ethical principles of accounting because auditors need to avoid conflicts of interest. There is already tension for internal auditors because of their employment status. They have to work harder to maintain their independence and avoid letting personal relationships influence their judgment.⁷

Pressure to Manipulate Reports

Internal auditors may face pressure to manipulate their reports to protect the organization from financial or legal penalties or make the business look like it’s doing better financially than it actually is. Auditors’ moral responsibilities require that they not give in to this type of pressure.⁷

Regulatory and Compliance Requirements for Ethical Auditing

To protect the interests of the public and ensure accurate financial records that are free from fraudulent or inaccurate information, auditors are bound by regulatory and compliance requirements.

Auditing Code of Ethics

Depending on their position and the type of organization they work for, auditors may be governed by oversight from several major regulatory bodies. The American Institute of Certified Public Accountants (AICPA) and the International Ethics Standards Board for Accountants (IESBA) set professional standards for accountants. These include specific guidelines and general principles for how accountants should perform their duties.⁸

The Public Company Accounting Oversight Board (PCAOB) was established by Congress and oversees audits of public companies in order to protect shareholders. Firms that audit public companies have to register with the PCOAB and follow their auditing standards.⁹

Ethics in Financial Reporting

Global financial markets depend on accurate financial reporting. Scandals from organizations such as Enron and the Lehman Brothers illustrate the widespread destruction that unethical accounting practices can lead to. Enron was a large energy company that engaged in fraudulent accounting practices that led to enormous investor losses and bankrupted the accounting firm Arthur Anderson in 2001. The scandal spurred Congress to create new regulations regarding corporate governance.¹⁰

The Lehman Brothers collapse in 2008 contributed significantly to the 2008 recession. The investment bank was driven into bankruptcy after making too many subprime loans and covering up its debt with fraudulent accounting.¹¹

Industry Regulations

Auditors and accountants are governed by multiple types of regulations. In the U.S., the Governmental Accounting Standards Board (GASB) establishes accounting and financial reporting standards through the Generally Accepted Accounting Principles (GAAP).¹²

The goal of following the GAAP is to bring consistency and completeness to a company’s financial statements. This consistency and completeness allow investors and other stakeholders to compare financial performance among different companies^.12

Use Your Skills to Promote Public Trust

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