Why Are Ethics and Integrity Essential in Accounting?

Accounting is a profession that leans heavily on rules, but even with all its guiding principles and frameworks, the job still requires a decent amount of interpretation, professional judgment and good sense. In my first year at a “Big 4” accounting firm, a seasoned mentor once compared the Generally Accepted Accounting Principles (GAAP) to a five-lane highway: The principles direct accountants from point A to point B, but people can choose to drive in the left lane, the right lane or somewhere in the middle. An accountant’s ethics and integrity are the guardrails in this analogy. They are essential to avoid drifting into dangerous territory — or worse, driving completely off the cliff into corruption. Here’s a detailed look at why ethics and integrity are so important in accounting.

What Is Integrity?

Integrity refers to strict adherence to a moral and ethical code of conduct that reflects transparency and honesty. A person with integrity follows rules and seeks to uphold the truth. People with high integrity can be counted on to consistently do the right thing, even when no one is watching. In the context of data, integrity refers to information that is accurate, complete and consistent. Data integrity is the assurance that digital information is uncorrupted and dependable, so businesses can rely on the data to help inform key decision-making.

What Is Integrity in Accounting?

Integrity in accounting refers to both honest humans and accurate data that makes for more trustworthy reporting and analysis, which improves decision-making among business leaders. Data that lacks integrity, whether because it is intentionally manipulated, is plagued by errors or fails to tell the full story, can mislead users, causing them to make unfortunate choices that can harm businesses and their stakeholders. The reliability of data and financial reporting is a key underpinning of accounting integrity.  

After all, a company’s investors, customers, vendors, employees and other stakeholders need to know they can trust the numbers; otherwise, they may decide to stop associating with the business. Companies must adhere to several layers of regulations, laws, standards and audits, stemming from agencies such as the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), federal, state and local governing bodies, and national and state accountancy boards. Accountants play a key role in the process of providing a company’s useful and fair financial information. One of their main purposes is to prevent, detect and deter inaccurate financial reporting in order to serve the public’s best interest. This lofty goal requires accountants to make a heavily entrenched commitment to integrity, which specifically calls for being honest and forthright about a company’s finances.

Key Takeaways

• Accountants follow extensive professional codes of conduct in order to serve the public’s best interest.
• Data integrity ensures that information is accurate, complete and useful for decision-making.
• Integrity, objectivity, independence and due care are key principles that guide an accountant’s ethics.
• Regulations strengthen the reliability of financial information and call for the punishment of those who lack integrity.
• Companies can commit to being transparent and support an ethical financial environment with the help of accounting software.

Integrity and Ethics in Accounting Explained

All accountants, including certified public accountants (CPAs), are expected to adhere to a strict professional code of ethics. The Code of Professional Conduct, set forth by the American Institute of CPAs, outlines the basic guidelines CPAs must follow while performing their duties. Specifically, the code stipulates that CPAs should employ integrity, objectivity, confidentiality and due care, and it notes that the public depends on these principles as a way to make sure the commerce system functions in an orderly manner. Having integrity and the appearance of integrity are both important in upholding the code of conduct. This means that accountants must make a commitment to be truthful, honest and fair in all of their business dealings.

Plus, they must separate themselves from any situation that would taint the appearance of integrity, such as being associated with financial statements that are materially misleading or contain false or reckless information. To reinforce the importance of integrity and ethics, state licensing agencies require CPAs to devote a portion of their annual continuing professional education to ethics courses.

Why Integrity and Ethics Are Important in Accounting

While various accounting trends may come and go, integrity and ethics are a constant way of life for accountants. The truth acts as a litmus test for their work. Like other public servants, accountants must always challenge themselves to protect and serve the public’s interest, primarily by ensuring that investors, large and small, have reliable information to make sound business decisions. In particular, accountants help ensure that companies present themselves fairly to potential lenders and other partners by issuing materially accurate financial statements. Moreover, integrity and ethics protect the reputation of the accounting profession. Accounting scandals in which business officials “cook the books” can lead to the downfall of companies, cause financial losses and the loss of public trust, unsettle markets and often ruin the careers of the accountants associated with them.

Integrity vs. Objectivity

Integrity pertains to upholding ethical standards and moral values; in short, it’s about doing what is right and just. Objectivity is the ability to remain independent, free from favoritism, bias or self-interest. For accountants, integrity and objectivity go hand in hand since it’s nearly impossible to properly serve the public interest if an accountant has personal conflicts of interest and lacks either integrity or objectivity.

In fact, CPAs who audit public companies are vetted for independence prior to being assigned to an audit engagement. Another important aspect of integrity is competency: having the knowledge and skills to do a job properly. Accountants with integrity would not knowingly engage with a company if they felt they were in over their heads and might create a shoddy work product.

How to Improve Integrity and Ethics in Accounting

The stories of integrity failures have been well documented and publicized in the news. Such failures have caused significant losses and have, at times, undermined the public’s faith in the financial markets. The Sarbanes-Oxley Act of 2002 (SOX) was enacted to protect shareholder value through a series of requirements aimed at improving corporate governance and reducing the risk of financial misstatements. People who violate the law face significant penalties for noncompliance.

While SOX has been acknowledged for successfully improving the credibility of financial disclosures and audits for both public and private companies, it’s hard to completely regulate personal integrity and ethics. After all, bad actors can find ways to corrupt any business. However, companies that focus on the following six tactics can help mitigate the risks of integrity failures.

Use software.

A strong control environment helps reduce the risk of errors and unethical behavior. A cloud-based accounting system with robust controls that is designed to prevent and detect incorrect or misleading data can reduce the odds of a business falling victim to fraud. For example, automated workflow approvals may help minimize the likelihood that an unapproved financial transaction will slip by unnoticed. At the same time, the right accounting software solution can address accounting challenges and improve the integrity of accounting data by applying accounting methods and charts of accounts more efficiently and consistently than manual accounting environments can accomplish.

Be transparent.

Transparency means being open, straightforward and honest. One way to achieve transparency in business is to craft a company code of ethics that clearly defines what the company values and also describes behavior that is unacceptable. Further, company leaders must not only “talk the talk,” but also “walk the walk,” acting as models of this code. In practice, transparency might mean discouraging risky behavior, even if it would be lucrative for the company. It could also include positive reinforcement, such as providing public recognition or monetary rewards for appropriate behavior.

Implement checks and balances.

A system of checks and balances, in which several people control a transaction in the accounting process, is an effective way to reduce the risk of fraud. For example, checks and balances translate to segregating duties so that some employees handle receipt and deposit functions while others record and reconcile accounts. It also means using a strong, consistent review and approval process, especially for cash disbursements, such as payroll, accounts payable and purchasing.

Make reporting offenses easy and anonymous.

Establishing a company culture that emphasizes transparency and a strong code of ethics can create an atmosphere where people actually feel positive peer pressure to do the right thing. Nonetheless, if someone deliberately violates the code or even breaks the spirit of it, a best practice for companies is to develop an established channel to report potential issues. Escalating a complaint can be an uneasy situation for some employees, especially if the offender is in a position of power. In fact, SOX requires a company to have an anonymous process in place to receive, document and treat complaints related to accounting and internal control issues. Making hotlines available for employees and others to report fraudulent activity is a common way many companies meet this requirement.

Allow open communication.

A company’s management should maintain an environment that encourages open communication and is supportive of whistleblowers. Business leaders may want to encourage people to report problems by embracing the adage: “If you see something, say something.” It’s equally as important to foster ethical communications, both internally and externally. This includes being truthful and sincere while providing complete and accurate information and refraining from withholding facts or being discourteous. Examples in the accounting process include outlining clear terms of sale on invoices and contracts and providing straightforward communication on efforts to collect credit sales.

Consider integrity a job requirement.

Weave integrity into all aspects of both hiring and retaining talent and promoting and dismissing employees and business partners. Companies can demonstrate to employees the importance of integrity by treating it as a high priority that is required for advancement, as well as outlining expectations for employees during training, performance and compensation reviews.

Ensure Accounting Integrity and Ethics With Accounting Software

Errors, inconsistencies and fraud can result from accounting integrity failures. One way to reduce those financial risks is to fortify the control environment. NetSuite Cloud Accounting Software improves accounting controls with an array of features, like automated workflow, approvals with customizable, delegated authorities, and access-based security. These capabilities support the segregation of duties and audit-trail reporting by providing alerts when sensitive information changes.

The software ensures data integrity and compliance with accounting standards, tax codes and internal policies by consistently applying rules and schedules, which also cuts down on interpretation and accounting manipulation risks. In addition, the software is compliant with SOX. Included as part of the NetSuite Enterprise Resource Planning System, which integrates all of a company’s core processes, stakeholders can trust the integrity of information in financial statements and other reports.
 processes.

Integrity in accounting provides investors, lenders and other business partners with a foundation that supports their trust in the financial markets. Because it is so important, professional licensing and oversight organizations have set forth professional codes of conduct that CPAs must adhere to. Additionally, government regulators have legislated rules for corporate governance, primarily through SOX. However, integrity and ethics are most effectively cultivated in a company culture of transparent and open communication, assisted by software that can monitor the financial process and flag discrepancies.

Integrity and Ethics in Accounting FAQs

What are due care and competence?

The due care principle is part of the ethical code of conduct issued by the American Institute of Certified Public Accountants. It requires accountants to comply with the profession’s technical and ethical standards, so they can perform their duties to the best of their ability. Competence is having sufficient experience and knowledge to complete tasks successfully and responsibly.

What are the benefits of integrity in accounting?

Integrity in accounting has many benefits, both at the company level and the individual level. For example, a company with strong integrity in accounting:

• Builds a trustworthy reputation — for both the business and its accountants.
• Ensures the accuracy of financial statements and analyses.
• Maintains the confidentiality of sensitive financial information.
• Handles responsibilities with competence and care.
• Provides straightforward, honest communication.
• Ensures regulatory compliance.

What will happen if a professional accountant lacks integrity?

Accountants who lack integrity, particularly if they knowingly disregard the law, may have their licenses revoked, can be subject to fines and may be sentenced to prison time.

Why is integrity important in accounting?

Accountants must always act with integrity because they are protecting and serving the public’s interest by ensuring that investors and other stakeholders have materially accurate financial statements and other reliable information on which to base decisions.

How do you demonstrate integrity in accounting?

Accountants make a heavily entrenched commitment to integrity. They demonstrate this commitment by being honest and forthright in all business dealings and by upholding what is right and just. They are objective and independent of bias or self-interest. Another way they show integrity is through competence and due care — by having the knowledge and skills to do a job properly — and by not knowingly accepting work they can’t handle. Furthermore, accountants must remove themselves from any situation that could color their appearance of integrity, such as being associated with financial statements that are materially misleading or contain false information.

What does integrity mean in finance?

Financial integrity generally has two meanings. One definition relates to the ability of an individual or business to satisfy their short-term and long-term obligations, such as payroll, supplier bills and loans. Another definition relates to being fiscally truthful and straightforward.

Why are ethics and integrity important to accountants?

Integrity and ethics protect the accounting profession. Accounting scandals shatter companies, cause financial and reputational loss, rock financial markets and can destroy the careers of the accountants associated with them. Accountants who act unethically can lose their licenses, incur fines and even face prison time.