Jan 25, 2018 in Economics

Accounting Principles

According to Meeks & Swann (2009, p. 196), accounting principles are the general rules that guide the accounting practices by the accountants. The principles are applied in the preparation of the financial statements by the accountants and are also used when interpreting the financials statements’ information by the users. These accounting principles are formed as a result of the consistent monitoring of the business activities and coming up with common way of treating or recognizing the business transactions. Thereon, developments are made and hence adoption by the various business entities.

Some of the general guidelines of the accounting consist of the economic entity assumption, monetary unit assumption, cost principle assumption, full expansion principle, going concern principle and matching principle. However, these principles may be applied differently depending on the geographical jurisdiction. For instance, the public firms in America use the Generally Accepted Accounting Principles (GAAP) in making their financial statements while the International Financial Reporting Standards, which are developed by the International Accounting Standards Board (IASB), are used by other countries. However, there have been arguments about adoption of the IFRS at the international level based on the need to ensure uniformity when making and interpreting the financial statements (Meeks & Swann, 2009, p. 196).

Even though many have argued for the adoption of similar financial reporting standards, some are still opposed to the idea. The ones who support the idea argue that it is very important to have same financial reporting standards since it would ensure comparability of the financial statements. While those who are against it argue that it would involve some costs such as the cost of training the accountants on the new principles. Another argument is that the economic environment can not be the same everywhere and so one system of financial reporting can not be uniformly favorable in all the situations (Meeks & Swann, 2009, p. 196).

According to Satava, Caldwell & Richards (2006, p. 273), human ethics is a very key issue that is addressed to all sorts of organizations. They are standards of behavior that state and guide the human behavior in various circumstances. Human beings normally find themselves in different situations and fields such as in business activities, professionals in various fields, or even in a child parent relationship. Therefore, in order to maintain a peaceful society, which can be at the government level, community level, business organization level and so on, there have to be ethical standards that guide people on the way they relate to each other.

It is therefore very important that people learn and know what ethics is and what ethics is not

This is because some people may follow their emotional feelings and think that whatever they feel makes them happy is ethically right even though it may be disgusting to other people or may not even be within the accepted codes of conduct. To identify what is ethical is also a challenging task but various philosophers have tried to identify the sources of ethics which include the Utilitarian approach. This approach states that ethics is the action which provides the best action from an individual or the action which does the least harm. Another argument about the source of ethics is that ethics is the action that protects and respects the human rights of those who are affected (Satava, Caldwell & Richards 2006, p. 273).

Velayutham (2003, p. 486) therefore notes that Professional ethics is the codes of conduct set by different professional organizations which are meant to be followed by their practicing professionals. These organizations may be in the field of accounting, medicine, teaching and so on. Emphases are normally put by such professional bodies so as to ensure that the professionals do not involve themselves in irresponsible behavior such as being dishonest, corruption and theft.

In the accounting profession, therefore, the accounting regulatory bodies have always tried to develop and enforce ethical standards among their accountants. This is in order to protect the image of the profession and also to ensure that the professionals deliver quality work to their clients and employers. These codes of ethics by the accounting practitioners include integrity, objectivity, professional competence and due care, confidentiality and professional behavior. Integrity is the ethical standard that requires that all the practicing accountants comply with the rules pertaining to honesty in all the professional activities and in any business relationships. On the other hand, objectivity requires that an accountant remains uninfluenced by any situation or any person in his professional decision making practices (Accounting professionals & Ethical Standards Board, 2006, p. 18).

Accounting professionals & Ethical Standards Board (2006, p. 19) further note that professional competence and due care require that an accountant should always approach his or her activities with a lot of professionalism. This is in order to protect the interest of his or her employer or client. While confidentiality is the ethical standard that requires that the accountants keep the confidential information of their clients or the accounting profession which he or she comes across in the course of doing his or her professional activities. Finally, it states that professional behavior is standard that requires that the accountants remain observant to the general laws and regulations which are relevant to their professional practice.

According to Khlif & Souissi (2010, p. 203), accounting field normally has its professionals either doing immediate accounting job or working as internal or external auditors. Auditors are the accountants who are engaged in examining the already made financial statements and stating whether they are the true and fair representations of such particular business organizations. Their opinions are normally relied on by the financial statement users such as the shareholders, lenders and potential investors for decision making and therefore should be stated in the most accurate manner. It is therefore very important that these auditing accountants remain very independent in their auditing activities.

Auditors’ independence refers to the auditors’ freedom to make decisions when conducting their activities as auditors without interference or influence from any party with special interest to the financial statements being audited. For an auditor to remain independent, he or she must follow the auditing rules and principles which require that an auditor should work without any influenced decision. However, the auditors at times find themselves in compromising situations which may make them lose their independence. In order to remain independent, the accounting bodies have come up with various ethical standards which should be observed by the auditors (Canada, Sutton & Kuhn 2009, p. 110).

According to Accounting professionals & Ethical Standards Board (2006, p. 36), an auditor should ensure that he or she has no family relationship with any of the directors of the company where he or she is the auditor. This will ensure that the auditor is not easily influenced under any sympathetic situation in order to write a biased auditing report. Another ethical standard for the accountants is that the auditors should not allow themselves to audit in any company in which they have any financial interest, either as shareholders or as lenders. This is because the auditor’s independence may be compromised and hence publishing unbiased reports regarding the company’s financial statements.

Additionally, the auditors should know that it is unethical to allow themselves to take some other accounting activities within companies where they are the external auditors. This is because by taking part in these other accounting activities, they may get used to the accounting staff that will rely on them for solving accounting problems and even getting to make biased opinions. Auditors should also ensure that they are very competent before they take into any auditing activity since failure to observe this may lead to the auditors relying on third parties for consultation which may end up influencing their decisions when giving their opinions (Bamber & Iyer 2009, p.142)

An employee or officer of a particular company also should not allow himself or herself to be contracted as an external auditor by the same company as this will also lead to leniency towards preparing the auditing report. Auditors also should not allow any unnecessary gifts from the client company’s management since they can be easily influenced by the management’s selfish interests in the company. Additionally, the auditors should allow the client’s accounting staff to assist in the actual auditing work as part of their support staff. This is because they can maliciously manipulate the accounting figures which will in effect interfere with the auditors’ opinion (Dellaportas, 2006, p. 397).

Accounting professionals & Ethical Standards Board (2006, p. 36) further states that when seeking for help from an expert, the auditor should also ensure that such expert is not related to the client’s company in any way. Such expert should also be highly qualified so that his opinion remains the same way it would be if he was the one performing the expert’s work. Finally, the auditing firms contracted as external auditors should not take part in any auditing activity if the contracting company contributes more than 15% of there overall earnings as an auditing company. This is because the auditors may tend to be so much lenient with the company’s directors and hence compromising their independence; and thereon coming up with the auditing report which is misleading to the financial statements’ information users.

In order to ensure that the auditors remain independent, the auditing companies have therefore to come up with some recommendations to be followed. The first is the need for the auditing companies to always practice staff rotation. This is the situation whereby the auditing company staffs are always allocated to work with different clients after sometime. This is in order to prevent the auditing staff from getting used to the client directors. Another approach towards ensuring that the auditors remain independent is that of conducting peer review activities. This is the situation whereby the already audited financial statements are redone by another auditing company to ascertain whether reports are true and fair. Therefore, the auditors will normally ensure that their decisions are not influenced (Accounting professionals & Ethical Standards Board 2006, p. 38)

Ethical examples relating to the professional independence may include a scenario whereby an auditor fails to deliver the exact findings in his audit report whenever he is asked by directors to do so for a reward. Also, if an auditor allows himself to audit a holding company to the company that he should not audit then it is considered unethical since it would compromise his independence.


In order to ensure the adherence to the accounting rules by practicing accountants, it is therefore necessary to state the ethical standards and put the necessary rules which will ensure that they behave ethically. For instance, the measures put to ensure that the professionals’ independence is enhanced should be strictly observed.


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