Ethical and Unethical Practices in Finance

Ethical Issues in Accounting

Accountants handle a wide range of privileged and sensitive data in their daily tasks. And because they work with numbers that can have repercussions on bonuses and stock prices, they may face ethical issues in accounting more often than, say, actuaries or budget analysts.

The ethical dilemmas that accountants sometimes face include conflicts of interest, payroll confidentiality, illegal or fraudulent activities, pressure from management to inflate earnings, and clients who request manipulation of financial statements.

When confronted with such dilemmas, an accountant needs to have the wherewithal to make difficult yet principled decisions. If you find you’re struggling with ethics issues in accounting or question the ethical implications of something in your job, here are four steps you can take:

1. Identify potential legal issues​

Explore whether the issue is regulated by law or policy. The source for information could be your employer, your professional association, a governmental regulatory body such as the U.S. Securities and Exchange Commission — or all of the above. The American Institute for Certified Public Accountants (AICPA) has a Code of Professional Conduct, and Financial Executives International has a Code of Ethics. Both are excellent resources if you’re uncertain about the ethics of a situation you’re confronting.

Also, a new standard by the International Ethics Standards Board for Accountants is expected to take effect by the end of the year. It redefines the roles of auditors, CFOs and other accounting professionals when they witness or suspect illegal acts at their organizations or within a client’s organization.

2. Take an outsider’s view

Think about, as a student, what you learned about ethics in your accounting studies. Or consider how you would feel if you were an outsider who read about the issue online or heard about it from a friend or family member. Sometimes, separating the issue from your personal and professional feelings can help you see it in a different light.

3. Identify the parties affected​

Think about the people, companies or stakeholders who could be affected by the issue — or by your decision to take or not take action. Remember that the failure to do something, such as not reporting fraud, can have just as much of an effect as if you yourself were the perpetrator.

4. Get professional advice

If you need to report the unethical or illegal behavior of your accounting colleague or employer, seek legal counsel — either in-house or from an independent firm — or access your company’s whistleblowing resources.

While a person’s professional ethics are certainly important, organizations should also have their own code of ethics and make sure all employees are familiar with it. Not only are more organizations providing ethics training to their employees, but they're also collecting and reporting ethical information.

If your employer does not have a code of ethics and standards, you and your team should advocate for one. An effective protocol will not provide a solution for every scenario, but it will act as a guide for the decision-making process. When creating a code of ethics from scratch, include guidelines on acceptable behavior, examples of ethical dilemmas and solutions, implementation and cost details, and the consequences for misconduct.

It can be tempting to lie low and not make waves when confronted with ethical issues in accounting. However, you owe it to your career, your profession and to society to act on violations you may discover instead of being complicit in fraudulent activities.

Unethical Practices in Finance

The unethical practices in accounting are more in proprietary, partnership and private limited companies. It is at lower levels in public limited companies and MNCs.

Some of the unethical practices in financing and accounting are as under:

i. Deliberate abnormal delays in payments to (a) Vendors, (b) Dealers commissions and promotion costs.

ii. Delays in paying wages, interest to financiers, incentive, bonus to employees.

iii. Holding up bills of vendors on silly reasons and ultimately buying from others to avoid payment to earlier vendors.

iv. Not prompt in statutory payments of ESI, PF, Sales Tax and Excise Duties.

v. Cheating employees of their dues towards medical expenses, leave travel assistance, children education fees etc.,

vi. Opening of current accounts in different banks to avoid adjustments against loans by earlier banker.

vii. Creating bogus bills of purchase to show higher costs and hence losses to avoid bonus payment to employees.

viii. Collecting loans from private financiers at higher rate of interest to help kith and kin and to get kick-backs.

ix. Quick release of payments to known or adjustment parties and delaying payment to others.

x. Taking private finance only from those who are ready to do personal favours to the finance department head.