Ethics in Accounting and Finance

The emergence of financial reporting and audit scandals such as Enron, WorldCom, Global Crossing, Tyco International, Xerox, Parmalat, Royal Ahold have deeply shaken the trust in capital markets, corporate management, financial reports, independent audit companies and financial markets. Ethics in finance and accounting has regained the importance because of those scandals, crimes, and unethical practices by financial institutions. Especially the Enron scandal in 2001 is a milestone. Prior to 2001, Arthur Andersen was considered one of the “Big Five” accounting firms not only in the United States but also in the world. Due to the extreme unethical actions of these and other organizations of that time, finance and accounting ethics has been brought to the fore in financial management processes even some people believe that in the field of finance and accounting there is no ethics.

1) Individual Level: individuals who were in key organizational positions and the ethicality of their decisions. 2) Corporate Level: the collective responsibility of all employees as well as the governance structures, systems and processes that operated within the organization to restrain appropriate behavior. 3) Regulatory Level: the interconnected organizations such as auditors, bankers, and other financial institutions cooperate in order to deceive or gain an advantage in the ongoing deception of the true company performance.

Business ethics apply to every area of business, whether it is breaking the agreement with your partners, showing misinterpreted ads on televisions, or child abuse, such companies get fined and punished for their unethical behavior. To avoid misunderstandings, it should be noted that it is not the intention of this contribution to distinguish between business ethics and ethics in finance. Ethics cannot be divided, but you can distinguish between different layers of ethics. In fact, some ethical principles play a more important role in finance and accounting than other areas of business.

Ethical issues in accounting and finance might be related to the following broad themes: Creative accounting, misrepresentation and inaccurate financial
reporting, accounting fraud, investment scams, conflict of interest, insider trading, hoarding, black market, bribery and extortion, money laundering, tax avoidance and tax evasion

Finance is related to the generation, allocation and management of financial resources for any purpose. There are three main types of finance: (1) personal finance, (2) corporate finance, and (3) public finance. Personal finance is the process of managing personal financial activities such as saving, investing, and borrowing money. The term often refers to the entire industry that provides financial services to individuals and households. Corporate finance and accounting deal with financing, capital structure, business activity reporting, and analysis that management conducts to increase the value of the company. Public finance is the management of a country’s revenue, expenditures, and debts to recognize when, how and why the government should intervene in the current economy, and also understand the possible outcomes of making changes in the market. This financial activity is facilitated by financial markets and financial intermediaries such as banks, exchanges, insurance companies, pension funds, investment trusts and other financial service providers that facilitate financial transactions.

In the financial markets, money and financial instruments such as stocks, bonds, futures, options and derivatives are issued or traded. Usually this activity takes place in organized markets such as stock or bond markets or commodity exchanges.

A set of rules and code of conduct which sets expectations in which the market dynamics work. However, the playing field is often influenced and moved in one way or the other based on information dissemination and resources. Financial industry in a broad sense, financial services would include services rendered by all financial institutions that are engaged in some form of borrowing and lending. In this wide sense, it would include financial intermediaries such as commercial banks, hire purchase finance companies, insurance companies, pension funds and investment trusts. In fact, trust is an integral issue for everyone in the financial industry.

There are tremendous changes in financial services and financial markets over the past few decades. Improvements on the information and communication technologies, increased financial globalization, uncertainty, speculation, increased regulation, increased public expectations and increased competition caused those changes. Today, there is a great pressure on people in the financial industry and the difficulty of success might cause unethical and illegal behavior.

Ethical behavior is fundamental to the success of the financial services industry. Financial services professionals must always apply the highest ethical standards. Investors expect and demand that financial services professionals adhere to sound ethical standards in all aspects of their activities, so financial services firms must align their business practices with ethical behavior.

• Full disclosure and transparency
• Professional duty vs. company demands
• Individual judgment vs. demands from
clients
• Misrepresentation
• Conflict of interest

The demand for financial information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are desirable in financial information. Financial information is useful when it is relevant and represents faithfully what it purports to represent.

Relevance refers to how helpful the information is for financial decision-making processes. Therefore, accounting information is relevant if it can provide helpful information about past events and help in predicting future events or in acting to deal with possible future events. Representational faithfulness is the extent to which information accurately reflects a company’s resources, obligatory claims, transactions, etc. The financial information in the financial reports should represent what it purports to represent. In other words, it should show what really are present and what really happened.

The general ethical standards of society apply to everyone in every profession as well as to people in accounting and finance professions. Securing a financial system that represents the highest level of ethics is a common effort. People working in accounting and finance should have the necessary understanding of ethical behavior and the commitment to act accordingly, just being a good person will not be enough. In addition, people should pay attention to the organizations and market structures in which they act, and especially to the pressures and incentives that operate on them. Society’s expectations from professionals are even higher.

There are three valuable and overarching ethical principles that can be applied to most problems in financial services: (1) avoid deception and fraud, (2) honor your commitments, and (3) fulfill the true purpose of your professional role. 

Integrity and truthfulness stresses the critical element of trust that is essential in all business relationships. Integrity is related to demonstrating behavior and actions consistent with a set of moral or ethical principles and standards accepted by individuals and institutions. The professional accountants and finance professionals must be straightforward and honest in all professional and business relationships. Integrity involves fair dealing, truthfulness and the strength character to act appropriately. 

Integrity and Truthfulness, Independence and Objectivity, Confidentiality and Transparency, Professional Competence and Due Care, Professional Behavior, No Harm (No Maleficence), Honesty, Fiduciary Duty, and Trust. 

The harmonization of national accounting systems to international standards are going to ensure full comparability of accounting information and also requiring common international ethical standards in accounting practices. In order to improve the image of the accounting profession and also prevent fraudulent accounting from taking place in institutions, accounting firms and governments have begun to promote ethics among accountants and introduced various regulations within the accounting profession. Due to the high expectations, the professions have adopted the ethical rules (codes of ethics), also known as professional codes of conduct. Codes of ethics or codes of conduct are only tools that determine these general principles for this purpose, provided that they are consistent with the general principles of ethics. These codes of
conduct require for its members to maintain a level of self-discipline that goes beyond the requirements of laws and regulations (Das Gupta, 2014, p.116). To help them, the code of conduct gives guidelines for right behavior in the profession. The code of conduct that the professional organization expects its members to create a sense of ethics in a profession. These codes contain a set of principles and rules that determine what the society expects to be considered in the decision-making process.

Ethical investing (or socially responsible investing - SRI) is a strategy in which a person chooses investments according to a personal code of ethics. Ethical investment (or socially responsible investment) supports industries that are making a positive change, such as sustainable energy.

Ethical investment is generally defined as the integration of personal values, social considerations and economic factors into the investment decision. Financial return remains an important outcome, but it is not the only criterion driving investment; including ethical concerns and social benefit. Socially responsible investment as investments will prioritize environmental factors, social factors and governance practices.

According to Domini’s classification, there are generally three different approaches to socially responsible investment (Domini and Kinder, 1986, p.2).

The first one is the “avoidance approach”. In this approach, the investor does not invest in companies that engage in activities that do not comply with their social values.

The second approach is the “positive choice approach”. In this approach, investors actively invest in companies that operate in line with their social values.

The third approach is the “activist approach”. In this approach, the investor invests in companies that they want to change and use their ownership rights to make the changes.

The International Organization of Securities Commissions (IOSCO) is the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda. The IOSCO Objectives and Principles of Securities Regulation have been endorsed by both the G20 and the FSB as the relevant standards in this area. They are the overarching core principles that guide IOSCO in the development and implementation of internationally recognized and consistent standards of regulation, oversight and enforcement. They form the basis for the evaluation of the securities sector for the Financial Sector Assessment Programs (FSAPs) of the International Monetary Fund (IMF) and the World Bank. Ethics in financial services generally takes the form of “codes”, that is, systematic statements of standards of conduct (e.g. those of the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP)). These codes typically demand “integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence.”

International Organization of Supreme Audit Institutions (INTOSAI) is an autonomous, independent and non-political organization. The International Organization of Supreme Audit Institutions (INTOSAI) operates as an umbrella organization for the external government audit community. It is a non-governmental organization with special consultative status with the Economic and Social Council (ECOSOC) of the United Nations. International Federation of Accountants (IFAC), the International Ethics Standards Board for Accountants (IESBA), the American Institute of Certified Public Accountants (AICPA) are well known organizations. According to the International Federation of Accountants, in the code of ethics for professional accountants, a distinctive sign of the accountancy profession is its acceptance of responsibility to act in the public interest. This code establishes the basic principles of professional ethics for professional accountants and provides a conceptual framework for the application of these principles.

One of the most important and powerful official regulatory agencies for the securities industry in Turkey is the Capital Markets Board of Turkey (CMB). Capital Markets Board of Turkey (CMB) is the regulatory and supervisory authority in charge of the securities markets in Turkey. The CMB has been making detailed regulations for organizing the markets and developing capital market instruments and institutions.

One of the most important and powerful official regulatory agencies in Turkey in order to ensure a more effective auditing and public oversight system, the Public Oversight, Accounting and Auditing Standards Authority (KGK) was established. The KGK is responsible for achieving an effective public oversight in Turkey. The KGK is also responsible for issuing ethical standards in compliance with international standards for auditors. KGK has published the Code of Ethics for Independent Auditors. KGK, has published the Auditing Standards of Turkey with reference to international standards issued by International Federation of Accountants (IFAC).

Union of Chambers of Certified Public Accountants of Turkey (TÜRMOB) is authorized to (i) monitor compliance with initial and continuing professional development requirements for its members; (ii) translate and monitor ethical requirements; and (iii) investigate and discipline members for breach of rules and professional standards. KGK, delegated the authority to conduct quality assurance (QA) reviews of non-public interest entities (PIEs) to TÜRMOB, under its oversight. TÜRMOB has the special authority to issue a Code of Ethics for other professional accountants. TÜRMOB has also adopted the 2018 International Code of Ethics developed by the International Ethics Standards Board for Accountants (IESBA). TÜRMOB is a member of the IFAC.