Throughout the development of the accounting ethics, rules had been the basic unit of ethical analysis. Rules-based approaches to ethics laid the foundation for the development of the major ethical standards for the accountancy profession and turned the letter of the rule into the ultimate goal of ethical compliance in accounting and financial decision-making. However, the recent scandals in the corporate world have turned the rules-based vs. principles-based dilemma into the issue of the major professional concern among accountants and legal professionals.
Given the benefits of the principles-based and rules-based approaches to ethics, a new system of ethical standards in accounting must combine the features of both systems, turning principles into the basic unit of ethical decision-making and using rules to back up and clarify ethical principles in accountancy. The Code of Ethics of the International Federation of Accountants The IFAC Code of Ethics reflects the most recent ethical developments for the accountancy profession and helps accountants all over the world to resolve the most complex ethical dilemmas.
The Code of Ethics claims that the need to act in public interest is the distinguishing feature of the accountancy profession. The Code consists of the three essential parts: Part A establishes and explains the fundamental principles of professional ethics in the accountancy profession; Parts B and C illustrate how the proposed ethical framework could be applied in various professional situations. The fundamental principles, according to IFAC Code of Ethics, include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
The Code of Ethics utilises the benefits of the principles-based approach to ethics and articulates the benefits of the conceptual ethical framework as opposed to traditional ethical rules.
According to IFAC, it is virtually impossible to identify each situation and each ethical threat in need for mitigation actions, and a conceptual framework gives professional accountants an opportunity to “identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules which may be arbitrary”.
As such, the use of principles-based conceptual frameworks is, primarily, in the public interest. The IFAC Code of Ethics identifies and lists the major threats to ethics in the accountancy profession and their respective safeguards. The former include self-interest threats, self-review and advocacy threats, familiarity and intimidation threats.
The safeguards which accountants can use to eliminate or reduce such threats can originate from the profession itself, legislation and regulation (education and training, continuous professional development, professional standards, disciplinary procedures or external reviews) or can be created by work environment (e. g. , effective ethical complaints systems). IFAC rules that a professional accountant’s responsibility is to decide what safeguards will be the most effective in mediating the effects of each particular ethical threat.
In the process of resolving ethical dilemmas, a professional accountant is expected to consider relevant facts and ethical issues at stake, fundamental ethical principles, established internal procedures, and alternative courses of action. The need to follow the basic principles of the accountancy profession is the ultimate goal of ethical performance for any professional accountant. Rule-based vs. principle-based ethical approach: A well-known dilemma
The Code of Ethics set by IFAC is the bright example of the principles-based approach to ethics and, simultaneously, an unexpected step away from the traditional rules-based ethical decision-making frameworks. The question is in whether principles-based approaches to ethics provide accountants with better decision-making opportunities and whether it is worth shifting emphasis from ethical rules to ethical principles. In brief, principles-based accounting creates a form of conceptual basis for accountants to follow, instead of the set of fixed rules.
The primary benefit of the principles-based ethics in accounting is in that it provides broad guidelines that can be successfully applied in a variety of ethical situations. Principles-based standards allow accountants using their professional judgment to assess the substance of each transaction. Ultimately, principles-based standards are simpler and easier to comprehend, and create conditions needed for the accounting statements to reflect more accurately each company’s actual performance; in other words, the use of principles-based standards for the accountancy profession reduces manipulations of the rules.
Other benefits of the principles-based ethics include: (a) the freedom for accountants to pursue the ethical principles in ways they deem the most effective and suitable in the given circumstances; (b) the freedom for creativity and innovation in the accountancy profession; (c) the possibility of an open dialogue between accountants and their clients/ supervisors. Unfortunately, principles-based ethical approaches are not without their problems.
The lack of consistent rules makes it difficult for accountants to apply proposed standards across organisations: for example, how can principles define the differences between probable and reasonably possible liabilities? More importantly, some principles may contradict each other and professional accountants will need to choose, which one to follow. Some accountants may be subject to political pressures and, as a result, will choose to depart from the principles of ethical conduct. These are just some out of many reasons why many companies still vote for the use of rules-based approaches to ethics.
The fact is in that rules-based approaches to ethics promote better comparability, better verifiability for regulators and auditors, and improve the communication of the standard developers’ intentions. Rules are the source of clarity and certainty for accountants. They guarantee transparency and promote fairness in relationships between accountants and their clients. Compared to principles, rules are more operational and simpler; they do not need to be supported by other, related rules or clarifications like principle do.
Despite these benefits, rules do not promote better accountability among accountants and auditors – according to Segovia et al. (2009), rules-based standards often lead auditors to allow their clients to manage earnings downward. The use of rules-based standards of ethical decision-making may lead accountants and auditors to allow using more aggressive reporting by clients. Researchers suggest that postmodern business and financial relations are so complex, that using principles-based ethical approaches is better than using ethical rules.
However, given that both rules-based and principles-based approaches to ethics have considerable benefits and display significant limitations, an ideal system of ethical decision-making for the accountancy profession might comprise the features of both systems. In other words, the ethical system for the accountancy profession must be guided by a set of principles which, in their turn, will be supported by a number of standards and rules. Principles will provide general guidelines; meanwhile, rules will improve the basic understanding of the principles and accountants’ compliance with them.
The combination of rules and principles will help accountants to address the emerging ethical complexities and create a balanced atmosphere of ethical compliance in accounting and business. Conclusion The current IFAC Code of Ethics is the bright example of the principles-based approach to accounting ethics. The Code provides a number of guidelines accountants must follow to successfully resolve or eliminate emerging ethical threats. The Code briefly discusses the most common ethical threats for the accountancy profession and evaluates the safeguards, which accountants can use in ethically controversial situations.
Postmodern accountancy displays the tendency toward using principles-based approaches to ethics, instead of conventional rules-based decision-making frameworks. However, both approaches display considerable benefits and drawbacks. As a result, an ideal system of ethics for the accountancy profession must comprise the features of both systems – it should be based on principles which, in their turn, will be supported by rules and standards. The combination of rules and principles will provide better ethical guidance and will improve ethical compliance in the accountancy profession.
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