Ethics in Accounting

Ethics in Auditing

The role of auditing has become more important with the emergence of fraud in the past ten plus years. Fraudulent activity has limited the credibility of the audit process and the government and public are holding accounting firms responsible for not detecting or reporting inaccurate financial statements. Users of financial statements rely on auditors’ opinions to make decisions, thus the auditor has a duty to these stakeholders to conduct the audit in a thorough manner and report their findings with full disclosure. What many don’t understand is that this is much easier said than done, and the auditor often faces pressure from clients that makes some decisions much more difficult and complex. In this paper I will explains why ethics is necessary in the audit profession. I will also go into detail about the relationship between the auditor and the client and some of the pressure that arises from this relationship. Lastly, I will mention steps that have been taken to increase independence between the accounting firm and the client.

In the California Supreme Court case Bily v. Arthur Young Co., Chief Justice Lucas is quoted, “Accountants are expected to be watchdogs, not bloodhounds. If employees find too much food in their food dish, they should at least think about whether or not the employer is just looking for a lapdog.” The way I interpret this from an auditing perspective is that accountants are responsible for protecting the public; however, certain incentives or pressures can be brought on by clients that can compromise the audit process. Once the interest in protecting the stakeholders is compromised, the accountant becomes a “lapdog” by blindly following the wishes of management rather than being morally responsible. Auditing requires ethics because it provides a public service. If that service becomes tainted and less creditworthy to the people it can become worthless. Take Enron and Arthur Andersen for example. When they engaged in unethical behavior and were exposed as frauds, both the firm and the client’s market values became worthless. The damage to the firm’s reputation was unforgivable due to its previous actions and lack of credibility.

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