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Business - Finance and Accounting.docx

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Western University
Philosophy 2074F/G
Michael Herbert

ETHICAL ISSUES IN FINANCE AND ACCOUNTING  The financial crisis of 2008-2009 was caused by a combination of reckless consumer borrowing  Executives were rewarded for making high-risk bets with investor assets when they succeeded, but were not penalized when the bets caused massive losses  In the US nearly 400 banks have failed since 2008  The global financial crisis that has developed during the last several years raises a wide variety of ethically significant questions about lending in particular and, more generally, the structure, culture and practise of the domestic and global financial services industry  At the core for most ethical issues between financial professionals, their clients and the public are fiduciary duties, that is, duties that have been entrusted to accounting or finance professionals based on a relationship of trust  The auditing function, the primary function of independent accountants is to determine whether a corporation’s financial reports are prepared in accordance with generally accepted accounting principles and fairly represented the financial position of the corporation for the relevant time period  Total independence Dusk and Duska mean both independence in fact and the appearance of independence from anyone or any group or organization that has a vested interest in the outcome of the audit  Congress passed the Sarbanes Oxley act in 2002 – this act was designed to help curb the worse abuses by holding executives directly responsible for accounting fraud and by enhancing sanctions so that executives would be deterred from approving fraudulent activity  He argues that the accounting industry has lost its integrity by failing to meet the most important responsibilities of any profession: self – regulation FINANCIAL SERVICES  Not everyone agrees that insider trading should be illegal. Some economists, for example, argue that insider trading does not harm anyone while benefitting those who trade on inside information  Strudler argues that the ethical wrong in shareholders. Since shareholders would never agree to such a contractual relationship he argues that insider trading is deceptive and should be illegal  When banks or other institutions make too many bad loans for this purpose, they may fail without government bailouts ETHICS IN AUDITING – DUSKA AND DUSKA  Given the way financial markets and the economic system have developed society has carved out a role for the independent auditor, which is absolutely essential for the effective functioning of the economic system  The role of the independent auditor is to see whether the company’s estimates are based on formulas that seem reasonable in the light of whatever evidence is available and that choice formulas are applied consistently from year to year  Corporate financial statements are one of the primary sources of information available to guide the decisions of the investing public  By examining the corporation’s books and records, the independent auditor determines whether the financial reports of the corporation have been prepared in accordance with generally accepted accounting principles  Burger puts the responsibility of the auditor clearly – to issue an opinion as to whether the financial statement fairly presents the financial position of the corporation, to bolster integrity and honesty the auditor must have as much independence as possible  Financial markets cannot operate without trust. Cooperation is essential and trust is a precondition of cooperation  Misrepresentation can only occur if the person lied to trusts the person lying  Once we recognize that certain people are unreliable or untrustworthy it becomes impossible for them to misrepresent things to us, because we don’t believe a word they’re saying  Irrationality lies in the fat that you are simultaneously willing the possibility of misrepresentation and the impossibility of misrepresentation, by willing out of existence the conditions (trust) necessary to perform the act you will to perform  Liars want a double standard  This role and the consequent duty to attest to the fairness of the financial statements gives the accountant special responsibilities to the public  By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending auditor assumes a public responsibility transcending any employment relationship with the client  The auditor has what justice Burger calls a public watchdog function  The evaluation of another accountant’s records have developed into a necessary component of capitalist societies particularly that part of society that deals in money markets and offers publicly traded stocks and securities  There needs to be a procedure for verifying the accuracy of the financial picture of companies  The auditor’s obligations are to certify that the public reports depicting a corporations financial status fairly presents the financial position and operations of the corporation for the relevant period  Since dilemmas arise because of conflicts of responsibility, it will be helpful to specify the particular responsibilities of an auditor  The point here is that the auditor is responsible for evaluating whether the management accountant is living up to his or her obligations and whether the international auditing controls are adequate and adhered to  In a most important area, the report went on to clarify that responsibility of auditors for the detection of fraud and the detection of errors and irregularities  Accounting firms are considered to be deep pockets and lawsuits happen to auditors with great frequency  To report such errors and irregularities seems to be one of the most serious and perplexing responsibilities of an auditor  Suffice it to say there is legal opinion that the duty of confidentiality is not absolute and overriding public interests may exist to which confidentiality must yield  Due professional care requires the auditor to exercise professional skepticism...an attitude that includes a questioning mind and critical assessment of audit evidence  The auditor neither assumes that management is dishonest nor assumes unquestioned honesty  This public watchdog function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust  Independence in fact is applicable to all accountants, for if the function of the accountant is to render accurate pictures of the financial situation, then conflicts of interest that cause inaccurate pictures do a disservice to whomever is entitled to and in need of the accurate picture  The ISB defined auditor independence as freedom from those pressures and other factors that compromise or can reasonably be expected to compromise an auditors ability to make unbiased audit decisions  As we noted, some auditors might be able to remain unbiased in such situations, but the rules apply to t
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