Make your own free website on

Ethical Considerations

Accounting systems serve the major purposes of both internal reporting for the decisions of managers and external reporting to other stakeholders.  There are increasing pressures to urge the participants of organizations for an obligation to maintain the highest standards of ethical conduct to their stakeholders under corporate governance.  OECD Principles of Corporate Governance defines corporate governance as .the system by which a corporation is directed and controlled・, of which .the structure specifies the distribution of rights and responsibilities among different participants in the company・ (Hart, 2001).  Corporate governance requires the responsibility or accountability be discharged with ethical considerations.  The Institute of Management Accountants has identified four standards of ethical conduct: competence, confidentiality, integrity and objectivity (Horngren et al, 2000). 

The ethical considerations of the president・s request and Carol・s dating the adjusting entries December 31 in the Diamond case are discussed as following.

The president・s request

Under the corporate governance, the president has a fiduciary responsibility to act in the best interest of the shareholders and plays an important role to the sustained competitive performance of the company.  So s/he must be capable of exercising objective judgment on corporate affairs.  Thus the ethical considerations of the president・s request are competence, integrity and objectivity.

By means of competency, the president must consider whether the request complies with the rules of corporate governance.  That is, her/his professional duties must be performed in accordance with relevant laws and regulations.  Friedman argues that in a capitalist economy, a firm must use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game which means open and free competition without deception or fraud (Demosthenous, 2000). 

By means of integrity, the president should avoid apparent conflicts of interest, for example s/he has to handle carefully the conflict between the actual performance and the profits of the company.  Moreover, s/he must be aware that s/he is responsible to monitor the conduct and performance of other employees.  So s/he must consider whether the request would engage the financial controller into an unethical activity. 

Finally, by means of objectivity, the president must communicate information fairly and objectively.  S/he must understand that any disclosure of irrelevant and unreliable information could influence an intended user・s understanding of the performance of the company.

Carol・s dating the adjusting entries December 31

Since accounting is part of the public information to justify a firm・s performance, an accountant plays an important role in making the firm more accountable.  Schweiker points out giving an account means that the accountants are constituted as moral agents and should help to create a broader accountability to establish ethical justification for the company, as well as the society (Shearer, 2002).  Same as the president, the ethical considerations of Carol・s dating the adjusting entries December 31 are competence, integrity and objectivity.

By means of competency, Carol must consider whether the dating back is compliance with the laws and regulations.  By means of integrity, she should understand that communicating unfavorable information and professional judgments or opinions to the users or stakeholders is unethical and irresponsible.  So she should refrain from engaging in and supporting any unethical activity.  If she is doubt about the president・s request, she should report the problem to her superior or next higher managerial level.  Finally, by means of objectivity, she should disclose objectively all relevant and reliable information so that the users can have clear understanding of the financial position of the company.

The creditability of the company and its image would be seriously affected for any decisions without ethical considerations.  The recent ethical lapses at Enron, Andersen, Merrill Lynch, etc can illustrate the fact.  Joyce Haboucha of the Enterprise Global Socially Responsive Fund (Dierdorff, 2002) emphasized that these days they use social and financial criteria in choosing their investments.  Although they are focused on producing good financial returns, they believe that corporations will affect their quality of life at many levels.  They think that the community cares about how corporations behave as social citizens as well as how they make money.  This concludes that ethical considerations are important in accounting systems and corporate governance as well.


Demosthenous, Maz (2000), .The Social Responsibility of Business: A Review・, The Flinders University of South Australia, [Online, accessed 26 February 2003]

Dierdorff, Jack (2002), .Searching for Good-Citizen Companies・, Business Week Online, [Online, accessed on 14 July 2002]

Hart, Michelene (2001), .Principles of Corporate Governance・, APEC Study Center, [Online, accessed 26 February 2003]

Horngren, C T; Foster, G and Datar, S T (2000), Cost Accounting: A Managerial Emphasis, 10th Edition, Prentice Hall International Inc

Shearer, Teri (2002), .Ethics and Accountability: from the For-itself to the For-the-Other・, Accounting, Organizations and Society, Elsevier Science Ltd, [Online, accessed 27 February 2003

Back to Accounting and Finance Article List