There are two major philosophies in accounting consisting of a principles-based system for accounting and a rules-based system for accounting. The following discussion will speak about these two philosophies and will define one as being a best fit for encompassing the role of ethics and the conceptual framework. The conceptual framework was established by the Financial Accounting Standards Board (FASB) and is used to help define the boundaries of accounting. It gives definitions of key terms and establishes consistent standards by which fundamental issues are defined.
This makes it easier to facilitate discussion and leads to greater efficiency in making accounting judgments. The framework plays a major role in supporting the development of accounting standards used for neutral information, which is then used to make informed investment decisions, benefiting the public. The goal is to reduce the influence of personal biases and to give a fair judgment or ruling. This unbiased information can be used knowing that the best intentions of the public were being considered.
This in turn should result in higher credibility and allow a more-informed judgment to be made.
Another role of the framework is to provide an overall standard that can be discussed and debated and give appropriate guidelines so a scenario can be discussed adequately with appropriate pros and cons. This creates an atmosphere where a scenario can be clearly defined and a decision can be reached on the specific purpose of the intended rules and desired results (Foster, 2001). The Role and Ethics of Decision Making The conceptual framework is just one small yet pertinent piece of an overall game plan that aids in defining moral and legal actions that should be taken when making any type of financial decision.
There are always professional judgments and decisions to be made, but the difficult part is that they are constantly changing because of all the changes that take place in the economic, technological, promulgatory, and regulatory environment. One of the primary goals of financial statements is to give accurate information on a business and its current, historical, or projected financial status. Since a company often profits when stakeholders see the company in a positive light, there becomes and ethical issue on how a business displays and reports itself financially.
There have been a number of scandals involving the misstating of financial information. This is not necessarily due to the shortcomings of accounting standards as much as the interpretation and manipulation of the standards. This calls into question the concept of ethics. There are a number of authoritative sources that help define not only accounting rules and practices, but also demonstrate morals and generally accepted accounting principles. These resources, such as FASB, GAAP, and the AICPA are all helpful in allowing for ethical accounting principles to be made.
Ethics is a highly discussed subject, especially in the educational training process prior to a career in any field. In the accounting profession as well as any other, it is up to the individual to decide the moral weight of their decisions. Not everyone has the same stand on these issues, so there is obviously room for personal preference, but there is a point at which an individual’s convictions are superseded by a lawful course of action. Part of making an ethical decision begins with the concept of research.
Research is in important process in understanding rules and applicable laws, and the neglect of the effort to research is a moral issue itself. It is the responsibility of each accountant to give due justice to gaining knowledge in areas where they are making decisions. This concept is also debated as to how often and how practical continuous research is needed, but it is essential to gain proper understanding and insight into areas where knowledge is inadequate or any type of clarification may be needed.
Research becomes difficult because of factors such as standards overload, knowledge differentials, knowledge as a moving target, new problems, and litigation. It is just about impossible for accountants to know everything that is expected of them and there become an overload of information, and research is needed to keep up with all of this new information. Accountants have worked on specializing in order to reduce the number of standards needed and to become an expert in the particular field of study. This knowledge is always changing because standards are constantly changing, so there is a need for continue research.
New issues often arise that have never been faced before. When the internet first became available, this was a new beast that needed to be tamed, and there were many changes that were made initially and many more that are still being determined to this day. Since accountants are making important financial decisions that often have a large impact on the financial well-being of companies and individuals, there have been increasing instances of lawsuits brought against auditors for violations to policies.
These are all supporting reasons why accounting requires sound judgment and ethics and a willingness to be proactive in researching to gain knowledge (Abdolmohammadi, 2002). Rules-Based versus Principles-Based Accounting The two philosophies of accounting are both useful and have been created to achieve accurate and appropriate accounting standards. The rules-based accounting defines specific actions that should be taken and give very detailed responses on how to prepare financial statements.
This, in a sense, dismisses the need to make an ethical decision, and gives a pre-defined course of action that can be followed and that would be legal. This helps avoid circumstances where accountants can be sued for using their own judgment and it ultimately diminishes poor decision-making on their part, resulting in greater accuracy. The negative aspect to this accounting system is the complexity of the rules that must be followed and as mentioned above, requires a lot of research and time.
The principles-based accounting seems to fall in line better with the FASB and the conceptual framework. It consists of Generally Accepted Accounting Principles (GAAP). It almost becomes a more simple set of key principles and objectives that can be followed. One of the advantages in this style of approach is that a general principle can be defined and then applied to a number of scenarios. The negative aspect to this accounting system is the lack of guidelines, resulting in inconsistent or even worse, unreliable information.
However, the same is true with the rules-based system, which does not as strongly account for the principle of why an action should or should not be taken. Arguments can be made supporting the principles-based methodology, and there are opinions that it seems to have a stronger case because if management is allowed to define the purpose and substance of their business activities, they would also be the best source to define the proper accounting for those activities (Batavick, 2003). Each situation can be different, and therefore should be handled differently and do not always fall within a set mold.
All of these concepts are very important in the field of accounting and in understanding the proper application of financial reporting and the responsibilities of ethics and the conceptual framework. They are all necessary and if used alone, would not be nearly as effective. Ethics, the conceptual framework, and both systems of accounting work together to give a well-rounded concept of what should be expected in carrying out the roles of accounting and allow for accurate and unbiased information that will be beneficial to all in the long run.
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