On the rare occasions when accountants are portrayed in TV and movies, they're invariably either bored, burnouts, or the most common trope of all: bad guys. From Ozark to Breaking Bad to Shawshank redemption, on-screen accountants are forever 'cooking the books'. But what does it actually mean to 'cook the books'? Is it a common practice? Is it illegal, or just frowned upon? And how do we ensure that accountants do the right thing?
It's time to explore the complex world of accounting ethics.
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What are accounting ethics?
There are many ways that an accountant can break the law. They can commit fraud, breach client confidentiality, embezzle funds, or act as an accessory to wrongdoing. While the legal specifics might vary from country to country, it's generally clear enough when someone has crossed a line. But what about behavior that, although not strictly illegal, might be… frowned upon? That's the purview of accounting ethics.
"Ethical compliance is key to maintaining public confidence in the accountancy profession."
- The Association of International Accountants
Accounting ethics run parallel to the legal and regulatory frameworks that govern the accounting profession. Unlike those legal and regulatory frameworks, however, accounting ethics are effectively voluntary ― although by conforming to a code of ethics, you are more likely to remain fully compliant and within the law.
Numerous professional organizations and industry bodies have their own distinct codes of ethics, although they tend to cover many of the same themes and behaviors. These are the five principles that govern the Association of International Accountants' code of ethics:
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behavior
The AICPA, meanwhile, expects its members to follow a code of conduct which includes:
- Integrity
- Objectivity
- Due care
- Competence
- To fully disclose any conflicts of interest
- To maintain client confidentiality
- To disclose to the client any commission or referral fees
- To serve the public interest when providing financial services
Accountants subscribe to these codes of ethics and others like them in order to maintain public trust, increase the confidence of internal stakeholders, ensure the accuracy of financial data, and establish legal and regulatory compliance. However, it is technically possible to breach a code of ethics without falling afoul of legal or regulatory obligations. Which brings us on to 'creative accounting'.
What is creative accounting?
"Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted."
- Ian Griffiths, former CEO and CFO, Kantar Group
If 'balancing the books' means balancing out the left and right columns of your account ledger, then 'cooking the books' means manipulating those figures to paint your company's finances in a more positive light. This practice is also known as 'creative accounting', and the above quote from British Businessman Ian Griffiths implies how widespread it might be.
Creative accounting is intended to exploit loopholes in the laws and regulations that govern the profession. Techniques include overstating revenues and moving assets and liabilities between accounting periods. Provided it's not taken too far, it is ― technically ― legal. However, creative accounting fails to reflect the 'spirit' of these laws, and so generally contravenes accounting codes of ethics.
But what about Ian Griffiths' assertion that "every company" is practicing creative accounting? If that's the case, should you be doing it too?
Should you practice creative accounting?
The purpose of creative accounting is to present a company's finances in the best possible light, and that sounds pretty noble. Certainly, it might be advantageous to do so if you want to impress shareholders, successfully apply for credit, or avoid tax obligations. But presenting a company's finances in the best possible light is not the same as presenting them in the most accurate light. By practicing creative accounting, you might cause your business to make financial decisions based on inaccurate data or fail to recognize an impending problem.
It's generally accepted that creative accounting is unethical, unprofessional, and brings accounting into disrepute ― hence the negative media stereotypes we mentioned earlier. Plus, the line between creative accounting and fraud is a fine one ― and the consequences of overstepping it can be severe.
If we were to distil the intention of accounting ethics into a single sentence, it would be to represent the financial health of a company or client as accurately and completely as possible. And that sentiment does not include creative accounting.
Maintaining ethics with AP automation
Upholding a code of accounting ethics requires effort and buy-in from your entire AP team. And AP automation software makes that process a whole lot easier, helping prevent the kind of mistakes that can undermine even the best intentions.
AP automation helps ensure your financial records and accounting data are as accurate as possible, starting with automated invoice processing. Quadient AP automatically captures invoice header data with 99% accuracy, accelerating the process and eliminating errors.
The platform also automates the 3-way matching process, ensuring your transactions match your records and no funds or purchases go unaccounted for. All of your accounting data is captured on intuitive and customizable dashboards that allow you to view multiple entities and even multiple ERPs via a single pane-of-glass. This provides you with end-to-end visibility of your AP workflow — so you'll never lose another invoice or miss another payment.
When it comes to managing payment approvals, automated workflows minimize bottlenecks in the process, ensuring you settle your invoices on time. The technology's expense management capability also uses automation to reduce the amount of time spent processing claims and lower the chance of errors. This plays an important role in minimizing fraud and expense abuse, while ensuring your business remains secure and compliant at all times.
AP automation enables you to improve your company's financial health in an ethical way. When your invoice processing is running 9x faster, there's really no need to exaggerate your financial performance.
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