ETHICS IN ACCOUNTING A training report submitted in partial fulfilment of the requirement for the degree of MASTERS OF BUSINESS ADMINISTRATION

ETHICS IN ACCOUNTING
A training report submitted in partial fulfilment of the requirement for the degree of
MASTERS OF
BUSINESS ADMINISTRATION
(2016-2018)

Submitted to: Submitted By:
Dr.Sandeep Singh Virdi Braininder Vir Singh Kaleka
Assistant Professor MBA – II (B)
Roll No:16421077
SCHOOL OF MANAGEMENT STUDIES
PUNJABI UNIVERSITY PATIALA
DECLARATION
I, BRAININDER VIR SINGH KALEKA, student of MBA-II (B), Roll No. 16421077, hereby declare that the Seminar Report entitled “ETHICS IN ACCOUNTING”, submitted in the partial fulfillment of requirement for the degree of Masters of Business Administration, is my original bonafide work and has not been submitted elsewhere for the award of any other degree, diploma, fellowship, or any other similar title.

Date: 26 / 02 / 2018
BRAININDER VIR SINGH KALEKA
MBA – II (B)
Roll No. 16421077

CONTENTS
Declaration ii
Chapter No. Title Page Nos.

1 Business Ethics 4-7
2 Accounting Ethics 8-11
3 Accountants & Ethics 12-16
4 Ethics in the Accounting Profession 17-21
5 Code Of Ethics For Chartered Accountants 22-31
6 What Is An “Ethical Issue” In Financial Accounting? 32-34
7 Accounting Scandals 35-39
8 Ethical Issues Facing The Accounting Profession 40-42
9 Causes 43-45
10 Ethical Conflict Resolution 46-51
11 Case Study 52-57
CHAPTER-I
BUSINESS ETHICS
BUSINESS ETHICS
Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.  These ethics originate from individuals, organizational statements or from the legal system. These norms, values, ethical, and unethical practices are what is used to guide business. They help those businesses maintain a better connection with their stakeholders.

Business ethics refers to contemporary organizational standards, principles, sets of values and norms that govern the actions and behaviour of an individual in the business organization.

ORIGIN OF BUSINESS ETHICS
When we trace the origin of business ethics we start with a period where profit maximisation was seen as the only purpose of existence for a business. There was no consideration whatsoever for non-economic values, be it the people who worked with organisations or the society that allowed the business to flourish.  It was only in late 1980’s and 1990’s that corporate began to show interest in business ethics.

Nowadays almost all organisations lay due emphasis on their responsibilities towards the society and the nature and they call it by different names like corporate social responsibility, corporate governance or social responsibility charter. 
In India Maruti Suzuki, for example, owned the responsibility of maintain a large number of parks and ensuring greenery. Hindustan Unilever, similarly started the e-shakti initiative for women in rural villages.

Business ethics reflects the philosophy of business, of which one aim is to determine the fundamental purposes of a company. 
Ethics are the rules or standards that govern our decisions on a daily basis. Many consider “ethics” with conscience or a simplistic sense of “right” and “wrong.” Others would say that ethics is an internal code that governs an individual’s conduct, ingrained into each person by family, faith, tradition, community, laws, and personal mores. Corporations and professional organizations, particularly licensing boards, generally will have a written “Code of Ethics” that governs standards of professional conduct expected of all in the field. It is important to note that “law” and “ethics” are not synonymous, nor are the “legal” and “ethical” courses of action in a given situation necessarily the same. Statutes and regulations passed by legislative bodies and administrative boards set forth the “law.”
Nowadays business ethics determines the fundamental purpose of existence of a company in many organisations. There is an ensuing battle between various groups, for example between those who consider profit or share holder wealth maximisation as the main aim of the company and those who consider value creation as main purpose of the organisation.

The former argue that if an organisations main objective is to increase the shareholders wealth, then considering the rights or interests of any other group is unethical. The latter, similarly argue that profit maximisation cannot be at the expense of the environment and other groups in the society that contribute to the well being of the business.

Nevertheless business ethics continues to a debatable topic. Many argue that lots of organisations use it to seek competitive advantage and creating a fair image in the eyes of consumers and other stakeholders. There are advantages also like transparency and accountability.

IMPORTANCE OF ETHICS
Satisfying Basic Human Needs: Being fair, honest and ethical is one the basic human needs. Every employee desires to be such himself and to work for an organization that is fair and ethical in its practices.

Creating Credibility: An organization that is believed to be driven by moral values is respected in the society even by those who may have no information about the working and the businesses or an organization. Infosys, for example is perceived as an organization for good corporate governance and social responsibility initiatives. This perception is held far and wide even by those who do not even know what business the organization is into.

Uniting People and Leadership: An organization driven by values is revered by its employees also. They are the common thread that brings the employees and the decision makers on a common platform. This goes a long way in aligning behaviors within the organization towards achievement of one common goal or mission.

Improving Decision Making: A man’s destiny is the sum total of all the decisions that he/she takes in course of his life. The same holds true for organizations. Decisions are driven by values. For example an organization that does not value competition will be fierce in its operations aiming to wipe out its competitors and establish a monopoly in the market.

Long Term Gains: Organizations guided by ethics and values are profitable in the long run, though in the short run they may seem to lose money. Tata group, one of the largest business conglomerates in India was seen on the verge of decline at the beginning of 1990’s, which soon turned out to be otherwise. The same company’s Tata NANO car was predicted as a failure, and failed to do well but the same is picking up fast now.

Securing the Society: Often ethics succeeds law in safeguarding the society. The law machinery is often found acting as a mute spectator, unable to save the society and the environment. Technology, for example is growing at such a fast pace that the by the time law comes up with a regulation we have a newer technology with new threats replacing the older one. Lawyers and public interest litigations may not help a great deal but ethics can.

Ethics tries to create a sense of right and wrong in the organizations and often when the law fails, it is the ethics that may stop organizations from harming the society or environment.

CHAPTER-II
ACCOUNTING ETHICS

ACCOUNTING ETHICS
ACCOUNTING
Accounting, or accountancy, is the measurement, processing and communication of financial information about economic entities. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of users including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants.

Accounting can be divided into several fields including financial accounting, management accounting, auditing, and tax accounting. Financial accounting focuses on the reporting of an organization’s financial information, including the preparation of financial statements, to external users of the information, such as investors, regulators and suppliers; and management accounting focuses on the measurement, analysis and reporting of information for internal use by management. The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system.

TYPES:
Financial Accounting:
Financial accounting focuses on the reporting of an organization’s financial information to external users of the information, such as investors, regulators and suppliers. It measures and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the needs of decision-makers.

Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006 reports on performance in 2005—on an annual or quarterly basis, generally about the organization as a whole.
Management Accounting:
Management accounting focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfil the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis, and are not required to follow GAAP.
Management accounting produces future-oriented reports—for example the budget for 2006 is prepared in 2005—and the time span of reports varies widely. Such reports may include both financial and nonfinancial information, and may, for example, focus on specific products and departments.

ACCOUNTING ETHICS
“Accountants and the accountancy profession exist as a means of public service; the distinction which separates a profession from a mere means of livelihood is that the profession is accountable to standards of the public interest, and beyond the compensation paid by clients.”
—Robert H. Montgomery
Accounting ethics is primarily a field of applied ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting ethics were first introduced by Luca Pacioli, and later expanded by government groups, professional organizations, and independent companies. Ethics are taught in accounting courses at higher education institutions as well as by companies training accountants and auditors.

Due to range of accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted within the accounting profession. These collapses have resulted in a widespread disregard for the reputation of the accounting profession. To combat the criticism and prevent fraudulent accounting, various accounting organizations and governments have developed regulations and remedies for improved ethics among the accounting profession.

Luca Pacioli, the “Father of Accounting”, wrote on accounting ethics in his first book Summa de arithmetica, geometria, proportioni, et proportionalita, published in 1494.Ethical standards have since then been developed through government groups, professional organizations, and independent companies. These various groups have led accountants to follow several codes of ethics to perform their duties in a professional work environment. Accountants must follow the code of ethics set out by the professional body of which they are a member. United States accounting societies such as the Association of Government Accountants, Institute of Internal Auditors, and the National Association of Accountants all have codes of ethics, and many accountants are members of one or more of these societies.

In 1887, the American Association of Public Accountants (AAPA) was created; it was the first step in developing professionalism in the United States accounting industry. By 1905, the AAPA’s first ethical codes were formulated to educate its members. During its twentieth anniversary meeting in October 1907, ethics was a major topic of the conference among its members. As a result of discussions, a list of professional ethics was incorporated into the organization’s bylaws. However, because membership to the organization was voluntary, the association could not require individuals to conform to the suggested behaviours. Other accounting organizations, such as the Illinois Institute of Accountants, also pursued discussion on the importance of ethics for the field. The AAPA was renamed several times throughout its history, before becoming the American Institute of Certified Public Accountants (AICPA) as its named today. The AICPA developed five divisions of ethical principles that its members should follow:
“Independence, integrity, and objectivity”;
“Competence and technical standards”;
“Responsibilities to clients”;
“Responsibilities to colleagues”;
“Other responsibilities and practices”.
Each of these divisions provided guidelines on how a Certified Public Accountant (CPA) should act as a professional. Failure to comply with the guidelines could have caused an accountant to be barred from practicing. When developing the ethical principles, the AICPA also considered how the profession would be viewed by those outside of the accounting industry.

CHAPTER-III
ACCOUNTANTS ; ETHICS

ACCOUNTANTS ; ETHICS
The International Federation of Accountants (IFAC) is an international body representing the world wide major accountancy bodies.
• Its mission is to help develop the high standards of professional accountants and enhance the quality of services provided.

IFAC ; ACCA
IFAC code of ethics indicates a minimum level of conduct for all accountants.

ACCA, as a member of IFAC, released its own code of conduct, designed to align with IFAC code.

The IFAC code is now administered by the International Ethical Standards Board for Accountants (IESBA).

• Key reasons for expectation of ethical behaviour of accountants:
– Ethical issues may be a matter of law and accountants are expected to apply them.

– The profession requires members to conduct themselves and provide services to the public according to certain standards.

– The reputation of the profession and standing is protected.

– An accountant’s ethical behaviour serves to protect the public interest.

APPROACHES TO ACCOUNTANCY ETHICS
Professionals, collectively share common views and values.

• Guidance from a governing body (regulatory or professional body) clarifies the matter regarding the expected professional behaviour.

• Such guidance is usually known as ‘code of ethics’ or ‘code of conduct’.

FRAMEWORK FOR CODE OF ETHICS
Identify threats to compliance with the fundamental principles.

Evaluate the significance of the threats identified.

Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.

THREATS
SELF-INTEREST THREATS
SELF-REVIEW THREATS
ADVOCACY THREATS
FAMILIARITY THREATS
INTIMIDATION THREATS
SELF-INTEREST THREAT: The threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behaviour.

SELF-REVIEW THREATS: The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service.

ADVOCACY THREAT: The threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised.

FAMILIARITY THREAT: Familiarity Threat occurs when, by virtue of a close relationship with a client, its directors, officers or employees, an auditor becomes too sympathetic to the client’s interests.

INTIMIDATION THREAT: The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant.

SAFEGUARDS
SAFEGUARDS CREATED BY THE PROFESSION, LEGISLATION OR REGULATION
SAFEGUARDS WITHIN THE CLIENT
SAFEGUARDS WITHIN THE FIRM’S OWN SYSTEMS AND PROCEDURES
SAFEGUARDS CREATED BY THE PROFESSION, LEGISLATION OR REGULATION:
Educational, training and experience requirements for entry into the profession
Continuing professional development requirements
Corporate governance regulations
Professional or regulatory monitoring and disciplinary procedures
External review by a third party of the reports, returns, communications or information produced by a professional accountant
SAFEGUARDS WITHIN THE CLIENT:
When the client’s management appoints the firm, persons other than management ratify or approve the appointment
The client has competent employees to make managerial decisions
Policies and procedures that emphasize the client’s commitment to fair financial reporting
A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm’s services
SAFEGUARDS IN THE WORK ENVIRONMENT
Leadership that stresses the importance of independence and the expectation that members of the teams will act in the public interest
Policies and procedures to implement and monitor quality control of the engagements
Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminate or reduce the threats.

CHAPTER-IV
ETHICS IN THE ACCOUNTING PROFESSION

ETHICS IN THE ACCOUNTING PROFESSION
The American Institute of Certified Public Accountants (AICPA) is a professional organization responsible for developing professional accounting ethical values. The AICPA requires professional accountants to act responsibly when engaging in accounting services and reviewing sensitive financial information. Accountants should always exercise sound moral judgment in all accounting activities. Accountants have the unique responsibility to provide clients with professional services while presenting a truthful and accurate assessment of a company’s financial health to the general public.

Integrity
Integrity is an important fundamental element of the accounting profession. Integrity requires accountants to be honest, candid and forthright with a client’s financial information. Accountants should restrict themselves from personal gain or advantage using confidential information. While errors or differences in opinion regarding the applicability of accounting laws do exist, professional accountants should avoid the intentional opportunity to deceive and manipulate financial information. Public accounting firms or private companies often develop a code of ethics or conduct for accountants. These ethics and conduct rules ensure all accountants act in a consistent manner. In the absence of specific rules or standards, accountants should review their actions to ensure they are following commonly accepted principles. A professional accountant should be straightforward and honest in all professional and business relationships.

Objectivity and Independence
Objectivity and independence are important ethical values in the accounting profession. Accountants must remain free from conflicts of interest and other questionable business relationships when conducting accounting services. Failure to remain objective and independent may hamper an accountant’s ability to provide an honest opinion about a company’s financial information. Objectivity and independence are also important ethical values for auditors. The accounting industry usually limits the number of services public accounting firms or individual certified public accountants (CPA) can offer clients. Accounting services include general accounting, auditing, tax and management advisory services. Accountants who perform more than one of these services for a client may compromise their objectivity and independence. For example, individuals who handle general accounting functions and then audit this information are essentially reviewing their own work. This situation may allow an accountant to hide a company’s negative financial information. A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

Professional Competence and Due Care
Due care is the ethical value requiring accountants to observe all technical or ethical accounting standards. Professional accountants are often required to review generally accepted accounting principles (GAAP) and apply this framework to a company’s specific financial information. Due care requires accountants to exercise competence, diligence and a proper understanding of financial information. Competence is usually based on individual’s education and experience. Thus, due care may require senior accountants to supervise and direct other accountants with less experience in the accounting profession. A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties.
Professional Behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

THE ROLE OF ETHICS IN ACCOUNTING
Ethics and professional practice
It is extremely important for accounting professionals to be ethical in their practices due to the very nature of their profession. The nature of accountants’ work puts them in a special position of trust in relation to their clients, employers and general public, who rely on their professional judgment and guidance in making decisions. These decisions in turn affect the resource allocation process of an economy. The accountants are relied upon because of their professional statues and ethical standards. Thus, the key to maintaining confidence of clients and the public is professional and ethical conduct.

Ensuring highest ethical standards is important to a ‘public accountant’ (one who renders professional services such as assurance and taxation service to clients for a fee) as well as to an ‘accountant in business’ (one who is employed in a private or public sector organisation for a salary). Both ‘public accountants’ and ‘accountants in business’ are in a fiduciary relationship, former with the client and latter with the employer. In such a relationship, they have the responsibility to ensure that their duties are performed in conformity with the ethical values of honesty, integrity, objectivity, due care, confidentiality, and the commitment to the public interest before one’s own.

Accountants are given access to private information and therefore the nature of their job means that people expect them to be highly trustworthy. With companies and clients investing more than just their trust in accountants, it is important that accountants have a strong sense of ethics beyond the basic wrong versus rights.

PERSONAL QUALITIES OF ACCOUNTANTS
• Reliability – Work should meet professional standards.

• Responsibility – Take ownership of your work.

• Timeliness – Complete work within agreed time frame.

• Courtesy – Conduct with courtesy and consideration towards clients ; colleagues.

• Respect – Recognizing the values ; rights of others.

PROFESSIONAL QUALITIES OF ACCOUNTANTS
Independence –Handle work without prejudice or bias and must be seen to be independent.
• Scepticism – Question information given to you, and form your own opinion regarding quality and reliability.

• Accountability – Be accountable for your own judgments and decisions.

• Social responsibility – Have a public duty: audit work, accountancy work, investment decisions may impact the public
CHAPTER-V
CODE OF ETHICS FOR CHARTERED ACCOUNTANTS

CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
INTRODUCTION
Financial statements of an enterprise depict the wholesome financial situation of the enterprise for a particular period / at a particular date. The information in these statements are of vital importance for a large section of the society, which deal with that enterprise. It may be suppliers of material, customers, investors, Banks, Financial Institutions, Insurers, Government, Tax Authorities, employees, collaborators and even their competitors. Keeping in view the importance of these statements and the large section of the society who use these statements for taking many vital decisions, it is necessary that these statements are attested by some person who is expert in this field so that the objectivity, integrity, reliability and credibility of the information is assured to a large extent. This function of attestation is done by professional accountants, who are Chartered Accountants in our country. It has been however, observed that there have been a number of cases in banks and financial institutions wherein due to the erroneous/ambiguous advice tendered by the respective Chartered Accountants, borrowal accounts have had to face quick mortality resulting in loss for the bank. Many a time this has also resulted in vigilance cases being initiated with the allegations of connivance/malafide/gross negligence being attributed to the concerned Bank officials.

1.1 For the success of the profession of accountancy a self-imposed Code of Ethics is essential to command the respect and confidence of the general public. Chartered Accountants in the service of the affairs of others have responsibilities and obligations to those who rely on their work.
1.2 A client, before engaging the services of a professional requires to be assured,
(i) That he has the required competence and
(ii) That he is a person of character and integrity. As regards the first, evidence is available to the client in the form of a certificate that the Chartered Accountant has undergone the training and passed the appropriate examination in accountancy and as regards the second, he would have an assurance only if the professional body to which he belongs has adopted a code of professional ethics for its members.

1.3 The International Federation of Accountants (IFAC), in its guidelines on Professional Ethics for the Accountancy Profession, has stated :-
“Persons who pursue a vocation in which they offer their knowledge and skills in the service of the affairs of others have responsibilities and obligations to those who rely on their work. An essential pre-requisite for any group of such persons is the acceptance and observance of professional ethical standards regulating their relationship with clients, employers, employees, fellow members of the group and the public generally.”
IFAC in its Code of Ethics for Professional Accountants has also stated as under:-
The Public Interest
A distinguishing mark of a profession is acceptance of its responsibility to the public. The accountancy profession’s public consists of clients, credit grantors, governments, employers, employees, investors, the business and financial community and others who rely on the objectivity and integrity of professional accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on the accountancy profession. The public interest is defined as the collective wellbeing of the community of people and institutions the professional accountant serves.

A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. The standards of the accountancy profession are heavily determined by the public interest, for example :-
– Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital;
– Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organization’s resources;
– Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer;
– Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and
– Management consultants have a responsibility towards the public interest in advocating sound management decision making.

Professional accountants have an important role in society. Investors, creditors, employers and other sections of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The attitude and behaviour of professional accountants in providing such services have an impact on the economic well-being of their community and country.

Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing “expectation gap” between the standards expected and those prescribed can be addressed or explained.

OBJECTIVES
The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement set out above. These objectives require four basic needs to be met :-
* Credibility: In the whole of society there is a need for credibility in information and information systems.
* Professionalism: There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field.
* Quality of Services: There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance.

* Confidence: Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services.

FUNDAMENTAL PRINCIPLES
In order to achieve the objectives of the Accountancy profession, professional accountants have to observe a number of prerequisites or fundamental principles. The fundamental principles are :-
* Integrity: A professional accountant should be straightforward and honest in performing professional services.

* Objectivity: A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity.
* Professional Competence and Due Care: A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques.

* Confidentiality: A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.

* Professional Behaviour: A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers and the general public.

* Technical Standards: A professional accountant should carry out professional services in accordance with the relevant technical and professional standards and the instructions of the client or employer in-so-far as they are compatible with the requirements of integrity, objectivity and in the case of professional accountants in public practice, independence. In addition they should confirm with the standards promulgated by :-
– IFAC (e.g. International Standards on Auditing);
– International Accounting Standards Board;
– The Member’s professional body or other regulatory body; and Relevant legislation.

1.4 Independence
When in public practice, an accountant should both be, and appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.

1.5 The over-riding motto has been ‘pride of service in preference to personal gain’. A code of professional conduct may have the force of law, as is the case in this country in some matters, as well as the result of discipline and conventions voluntarily established by the members, any breach whereof would result in the person being disentitled to continue as a member of the professional body. In any event, it has a great deal of practical value in so far as it proclaims to the public that the members of the profession will discharge their duties and responsibilities, having regard to the public interest. This, in turn, will give an assurance to the public that in the event of a member straying away from the path of duty, he would be suitably dealt with by the professional body.

“Other Misconduct”
In this background, the Chartered Accountants Act, 1949 (as amended up to date), was formulated to regulate the profession of Chartered Accountancy. This Act is being administered through the Institute of Chartered Accountants of India; which functions and discharges its duty through a ‘Council’. To ensure discipline in the profession, The Chartered Accountants Act along with its schedules sets out different forms of behaviour, which constitute misconduct under the law. The definition of misconduct in the Act is only an inclusive one and is not exhaustive. Over and above this, the council of the Institution (ICAI) has also been given powers under the law to enquire into the conduct of any member of the Institute other than those specified in the Act, which may in the view of the COUNCIL be not desirable and/or expected of a Chartered Accountant. This kind of misconduct is known as ‘other misconduct’. The ‘other misconduct’ may not necessarily arise out of professional work. With a view to bring harmony in presentation of the financial statements and an identical treatment in a particular situation, the ICAI has brought out various Statements, Auditing and Assurance Standards, Accounting Standards and Guidance Notes, which are mandatory for a practicing Chartered Accountant to be adhered to while discharging his professional duty of attestation of financial statements. These sets of documents necessitate that financial statements are depicted in a definite manner, and give the required information in the desired manner, which are professionally verified by applying scientific audit techniques to ensure material correctness to a large extent. The objectivity and integrity of the financial statements attested by a Chartered Accountant following these sets of documents, are of a very high degree, and which enhance the credibility and reliability of these statements to the user. A Chartered Accountant who does not follow these sets of documents in discharging his professional duty of attestation, is guilty of professional misconduct, and thereby liable for disciplinary action and punishment under the Act, which may be;
Reprimanding the member or
Removing his name from the Register of members for such period not exceeding five years, or
Forwarding the case to the High Court with its recommendations where the council opines for removal of name for a period exceeding five years, or

The procedure of enquiry in respect of disciplinary action against a Chartered Accountant is not only lengthy but rigorous also. Barring a few exceptions, the Chartered Accountant, who has to face action would feel so humiliated that his enthusiasm and working capacity comes to the lowest level. Removal of name as a punishment further nails him with a severe economic blow.

Still there are instances when it is noticed that the report of Chartered Accountants either misses vital information which must be there, or gives incomplete information or gives an information in a misleading manner or at times gives a completely wrong information. It is pertinently noticed by bank officials in dispensation of credit and monitoring of some financed cases, that information in the financial statements does not help in taking a right and judicious decision. Though it is difficult to substantiate by tangible evidences, but circumstantial evidences in certain cases, do point out that the intention of all concerned has not been bonafide, rather it is malafide and is done with some ulterior motive.

Some of the common points where reports of Chartered Accountants have not been of desirable level are :-
-Valuation of stocks including work in progress.

– Transactions with related parties.
– Valuation of investments
– Valuation and status of other assets.

– Status of Sundry Debtors
– Status of Creditors
– Status of loans
– Provision in respect of all the known liabilities.

All these issues have a considerable impact on profit and the real financial health of an enterprise, failure of which would prevent taking of a well informed, correct decision by banks and financial institutions.
Here it may not be out of place to mention that banks and financial institutions are heavily relying on Chartered Accountants in discharging their work in judicious manner. For this the banks get various type of reports and certificates which the banks have devised after much deliberations. If these certificates give the required information in the right perspective, the loan assets of the banks to a large extent may be saved from becoming bad.

These certificates and reports in general are :-
• Annual Audit Report on the Accounts of Borrower
CAs have to be transparent and absolutely honest while certifying the following items:
Valuation of inventory – stock, work in progress, finished goods, etc. (It may be observed that variations in the sale of the stocks declared by the companies in their stock statement for the year ending position in March and the value of stocks declared in the annual accounts subsequently are on account of this.)
Dealing with group accounts – Normally this is where diversion of funds take place. CAs also should comment whether transactions are at par with commercial transactions done with other parties. CAs also should comment whether investments in group companies are safe and sound.

It should also be commented whether any bad debt is included under Sundry Debtors, whether loans and advances to group companies are camouflaged under sundry debtors to avail book debt finance, whether any fictitious debt is created to avail finance from banks (like fertilizer subsidy financed against by banks).

Whether any fictitious sales are booked to inflate sales/profit.

• Stock Audit of Borrowal accounts
CAs should bear in mind that based on their certificate, the banks value the security. Any false certificate will affect the security of the bank and jeopardize their funds. The valuation of stocks should be judged correctly. The valuation of especially work-in-progress should be studied in depth. The sundry creditors position should be analyzed to see whether paid for stocks is adequate. The sundry debtors position should be analyzed to ensure that:
The debts are good and realizable;
No bad debt is included;
In case of debts relating to group company, they are reflecting genuine commercial transaction;
No fictitious debt is created.

Regarding specific certificates/tasks, sometimes, in order to comply with the terms of sanction in a hurry, banks get these certificates from any CA. The purpose of the banks will be served better, if they insist that the ‘statutory auditors’ to the Company should give these certificates.

• Specific certificate with respect to infusion of capital or family loans.
• Monitoring of accounts with a specific objective.

• Certification of utilization of funds for the desired end use.

However the plight is that these certificates and reports do not give the required information in the required manner and therefore fail to serve the desired purpose. Besides the large number of disclaimers made lessen the authenticity of the Report made by the Chartered Accountant.

At times CAs also function as directors of companies on their Boards. What is to be Code of Conduct for them is well defined in Naresh Chandra Committee Report and should be implemented.
If these certificates and reports are objectively prepared keeping in view the statements, standards and guidance notes issued by ICAI, it is believed that the required information in the required manner will be available to a large extent.

In short, the essence of the whole issue is that the rigorous disciplinary action of ICAI also seems to be ineffective to some extent in deterring some of the Chartered Accountants from resorting to undesirable practices. The reason for this, seems to be that many a time undesirable practices are not caught and only sparingly CA(s) get punished for their intentional misdeeds; which again is a time taking process.

CHAPTER-VI
WHAT IS AN “ETHICAL ISSUE” IN FINANCIAL ACCOUNTING?
WHAT IS AN “ETHICAL ISSUE” IN FINANCIAL ACCOUNTING?
Ethics in accounting are concerned with how to make good and moral choices in regard to the preparation, presentation and disclosure of financial information. During the 1990s and 2000s, a series of financial reporting scandals brought this issue into the forefront. Knowing some of the issues presented in accounting ethics can help you ensure that you are considering some of the implications for the actions that you take with your own business.

Fraudulent Financial Reporting
Most accounting scandals over the last two decades have centered on fraudulent financial reporting. Fraudulent financial reporting is the misstatement of the financial statements by company management. Usually, this is carried out with the intent of misleading investors and maintaining the company’s share price. While the effects of misleading financial reporting may boost the company’s stock price in the short-term, there are almost always ill effects in the long run. This short-term focus on company finances is sometimes known as “myopic management.”
Misappropriation of Assets
On an individual employee level, the most common ethical issue in accounting is the misappropriation of assets. Misappropriation of assets is the use of company assets for any other purpose than company interests. Otherwise known as stealing or embezzlement, misappropriation of assets can occur at nearly any level of the company and to nearly any degree. For example, a senior level executive may charge a family dinner to the company as a business expense. At the same time, a line-level production employee may take home office supplies for personal use. In both cases, misappropriation of assets has occurred.

Disclosure
As a subtopic of fraudulent financial reporting, disclosure violations are errors of ethical omission. While intentionally recording transactions in a manner that is not in accordance with generally accepted accounting principles is considered fraudulent financial reporting, the failure to disclose information to investors that could change their decisions about investing in the company could be considered fraudulent financial reporting, as well. Company executives must walk a fine line; it is important for management to protect the company’s proprietary information. However, if this information relates to a significant event, it may not be ethical to keep this information from the investors.

Penalties
This legislation allows for harsh penalties for manipulating financial records, destroying information, interfering with an investigation and provides legal protection for whistle-blowers. In addition, chief executives can be held criminally liable for the misreporting of their company. 
CHAPTER-VII
ACCOUNTING SCANDALS
ACCOUNTING SCANDALS
Accounting scandals are business scandals which arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities. It involves an employee, account or corporation itself and is misleading to investor and shareholders.

This type of “creative accounting” can amount to fraud, and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States. Employees who commit accounting fraud at the request of their employers are subject to personal criminal prosecution.

From the 1980s to the present there have been multiple accounting scandals that were widely reported by the media and resulted in fraud charges, bankruptcy protection requests, and the closure of companies and accounting firms. The scandals were the result of creative accounting, misleading financial analysis, as well as bribery.

Accounting ethics has been deemed difficult to control as accountants and auditors must consider the interest of the public (which relies on the information gathered in audits) while ensuring that they remained employed by the company they are auditing. They must consider how to best apply accounting standards even when faced with issues that could cause a company to face a significant loss or even be discontinued. Due to several accounting scandals within the profession, critics of accountants have stated that when asked by a client “what does two plus two equal?” the accountant would be likely to respond “what would you like it to be?”. This thought process along with other criticisms of the profession’s issues with conflict of interest, have led to various increased standards of professionalism while stressing ethics in the work environment.
The role of accountants is critical to society. Accountants serve as financial reporters and intermediaries in the capital markets and owe their primary obligation to the public interest. The information they provide is crucial in aiding managers, investors and others in making critical economic decisions. Accordingly, ethical improprieties by accountants can be detrimental to society, resulting in distrust by the public and disruption of efficient capital market operations.
From the 1980s to the present there have been multiple accounting scandals that were widely reported on by the media and resulted in fraud charges, bankruptcy protection requests, and the closure of companies and accounting firms. The scandals were the result of creative accounting, misleading financial analysis, as well as bribery.

In the modern industrial economy, the finance is blood of life. We cannot think of formation of the companies without finance. The success of any companies and organization is directly subjected to the finance adequacy and its efficacious utilizations. But sometimes different accounting standards of different countries create a difficult problem. For growth of world economy there is need to adopt one global standard so that participants around all over the world receive the same fair view of enterprises results regardless operating in different geographic area. Nowadays in many areas of accounting and financial reporting ethics are a prominent issue. Ethics should be an essential part of the business and several other areas on ethical decision makings. The dictionary definitions of the word ethics is a system of principles governing morality and acceptable conduct, and ethical code.According to The Oxford Dictionary, Ethics means moral principles or rules of conducts. It is combination of moral principals or manner of actions which are acceptable or unacceptable in field of human activity. Ethics is a voluntary phenomenon. It cannot be forced but it should be sway. Financial reporting is directly and indirectly related with accounting and economics. Financial reporting plays a crucial role in corporate governance. Financial reporting is a financial statement of any organizations or companies which disclose the financial status to the government, management and investors. The issue of ethics sustaining true financial reporting of company assets, liabilities and profits without forcing on them by management or corporate officers. The ethics have raised the value of ethical decision on business which is affected to the stockholders, creditors and other parties by the financial performance of companies.

Some unethical activities have high concern in the organizations like fraudulent financial reporting, personal trading, insider trading, misappropriation of assets and disclosure. The significance of ethics in accounting has been verified by some old scandals.
TWO TYPES OF FRAUD
Misappropriation of assets
Misappropriation of assets, often called defalcation or employee fraud, occurs when an employee steals company’s asset, whether those assets are of monetary or physical nature. Typically, assets stolen are cash or cash equivalents and company data or intellectual property. However, misappropriation of assets also includes taking inventory out of a facility or using company assets for personal purpose without authorization. Company assets include everything from office supplies, inventory to intellectual property.

Fraudulent financial reporting
Fraudulent financial reporting, also known as earnings management fraud. In this context, management intentionally manipulates accounting policies or accounting estimates to improve financial statements. Public and private corporations commit fraudulent financial reporting to secure investor interest or obtain bank approvals for financing, as justifications for bonuses or increased salaries or to meet expectations of shareholders. The Securities and Exchange Commission has brought enforcement actions against corporations for many types of fraudulent financial reporting, including improper revenue recognition, period-end stuffing, fraudulent post-closing entries, improper asset valuations, and misleading non-GAAP financial measures.

THE FRAUD TRIANGLE
The fraud triangle is a model for explaining the factors that cause someone to commit fraudulent behaviours in accounting. It consists of three components, which together, lead to fraudulent behaviour:
Incentives/ Pressure: Management or other employees have incentives or pressures to commit fraud.

Opportunities: Circumstances provide opportunities for management or employees to commit fraud.

Attitudes/ Rationalization: An attitude, character, or set of ethical values exists that allows management or employees to commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act.
Incentives/ Pressures: A common incentive for companies to manipulate financial statement is a decline in the company’s financial prospects. Companies may also manipulate earnings to meet analysts’ forecasts or benchmarks such as prior year earnings, to meet debt covenant restrictions, to achieve a bonus target based on earnings, or to artificially inflate stock prices. As for misappropriation of assets, financial pressures are a common incentive for employees. Employees with excessive financial obligations, or those with drug abuse or gambling problems may steal to meet their personal needs.
Opportunities: Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies in industries where significant judgments and accounting estimates are involved. Turnover in accounting personnel or other deficiencies in accounting and information processes can create an opportunity for misstatement. As for misappropriation of assets, opportunities are greater in companies with accessible cash or with inventory or other valuable assets, especially if the assets are small or easily removed. A lack of controls over payments to vendors or payroll systems, can allow employees to create fictitious vendors or employees and bill the company for services or time.
Attitudes/ Rationalization: The attitude of top management toward financial reporting is a critical risk factor in assessing the likelihood of fraudulent financial statements. If the CEO or other top managers display a significant disregard for the financial reporting process, such as consistently issuing overly optimistic forecasts, or they are overly concerned about the meeting analysts’ earnings forecast, fraudulent financial reporting is more likely. Similarly, for misappropriation of assets, if management cheats customers through overcharging for goods or engaging in high-pressure sales tactics, employees may feel that it is acceptable for them to behave in the same fashion.

CHAPTER-VIII
ETHICAL ISSUES FACING THE ACCOUNTING PROFESSION
ETHICAL ISSUES FACING THE ACCOUNTING PROFESSION
An accountant working in the public or private sector must remain impartial and loyal to ethical guidelines when reviewing a company or individual’s financial records for reporting purposes. An accountant frequently encounters ethical issues regardless of the industry and must remain continually vigilant to reduce the chances of outside forces manipulating financial records, which could lead to both ethical and criminal violations.

Pressure From Management
The burden for public companies to succeed at high levels may place undue stress and pressure on accountants creating balance sheets and financial statements. The ethical issue for these accountants becomes maintaining true reporting of company assets, liabilities and profits without giving in to the pressure placed on them by management or corporate officers. Unethical accountants could easily alter company financial records and maneuver numbers to paint false pictures of company successes. This may lead to short-term prosperity, but altered financial records will ultimately spell the downfall of companies when the Securities and Exchange Commission discovers the fraud.

Accountant as Whistleblower
An accountant may face the ethical dilemma of reporting discovered accounting violations to the Financial Accounting Standards Board. While it is an ethical accountant’s duty to report such violations, the dilemma arises in the ramifications of the reporting. Government review of company financial records and the bad press caused by an accounting scandal could cause the company’s rapid decline and may lead to the layoff of thousands of employees. Executives and other corporate officers could also face criminal prosecution, leading to heavy fines and prison time.

The Effects of Greed
Greed in the business and finance world leads to shaving ethical boundaries and stepping around safeguards in the name of making more money. An accountant can never let the desire to earn a better living and acquire more possessions get in the way of ensuring that she follows ethical guidelines for financial reporting. An accountant who keeps her eyes on her own bank account more than on her company’s balance sheet becomes a liability to the company and may cause real accounting violations, resulting in sanctions from the SEC.

Omission of Financial Records
A corporate officer or other executive may ask an accountant to omit or leave out certain financial figures from a balance sheet that may paint the business in a bad light to the public and investors. Omission may not seem like a significant breach of accounting ethics to an accountant because it does not involve direct manipulation of numbers or records. This is precisely why an accountant must remain ethically vigilant to avoid falling into such a trap.

CHAPER-IX
CAUSES
CAUSES
Fraudulent accounting can arise from a variety of issues. These problems usually come to light eventually and could ruin not only the company but also the auditors for not discovering or revealing the misstatements. Several studies have proposed that a firm’s corporate culture as well as the values it stresses may negatively alter an accountant’s behaviour.

A weak internal control is an opportunity for fraudster Lack of transparency in financial transactions is an ideal method to hide a fraud. Poor management information where a company’s management system does not produce results that are timely, accurate, sufficiently detailed and relevant. In such case, the warning signal of fraud such as ongoing theft from bank account can be obscured. Lack of an independent audit department within the company is also a sign of weak internal control. Poor accounting practice is also part of a weak internal control. An example of poor accounting practice is failure to make monthly reconciliation of bank account.
Top executive can reduce the price of his/her company’s stock easily due to information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company’s profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company’s earnings forecasts.

Top managers tend to share price to make a company an easier takeover target. When the company gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfall from the former top executive’s actions to surreptitiously reduce share price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work.
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. Top executives often reap tremendous monetary benefits when a government-owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis – this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell. It can also contribute to a public perception that private entities are more efficiently run, thereby reinforcing the political will to sell off public assets. Again, due to asymmetric information, policy makers and the general public see a government-owned firm that was a financial ‘disaster’ – miraculously turned around by the private sector (and typically resold) within a few years.

Not all accounting scandals are caused by top executives. Often managers and employees are pressured or willingly alter financial statements for the personal benefit of the individuals over the company. Managerial opportunism plays a large role in these scandals. For example, managers who would be compensated more for short-term results would report inaccurate information, since short-term benefits outweigh the long-term ones such as pension obligations.

CONFLICTS OF INTEREST
ACCA members should be aware that a conflict between members’ and clients’ interests might arise:
– members compete directly with clients, or
– have a joint venture with a company that is in competition with the client
• Members and firms should not accept or continue engagements in which there are, or likely to be, significant conflicts of interest between members, firms and clients.

• Members should evaluate the threats arising from a conflict of interest
• They should apply safeguards like:
– Disclosure is the most important safeguard
– Using a separate team or signing confidentiality agreements
CHAPTER-X
ETHICAL CONFLICT RESOLUTION
ETHICAL CONFLICT RESOLUTION
In evaluating compliance with the fundamental principles, a professional accountant may be required to resolve a conflict in the application of fundamental principles.

When initiating either a formal or informal conflict resolution process, a professional accountant should consider the following, either individually or together with others, as part of the resolution process:
(a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles related to the matter in question;
(d) Established internal procedures; and
(e) Alternative courses of action.

Having considered these issues, a professional accountant should determine the appropriate course of action that is consistent with the fundamental principles identified. The professional accountant should also weigh the consequences of each possible course of action. If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm* or employing organization for help in obtaining resolution.

Where a matter involves a conflict with, or within, an organization, a professional accountant should also consider consulting with those charged with governance of the organization, such as the board of directors or the audit committee.

It may be in the best interests of the professional accountant to document the substance of the issue and details of any discussions held or decisions taken, concerning that issue.

If a significant conflict cannot be resolved, a professional accountant may wish to obtain professional advice from the relevant professional body or legal advisors, and thereby obtain guidance on ethical issues without breaching confidentiality. For example, a professional accountant may have encountered a fraud, the reporting of which could breach the professional accountant’s responsibility to respect confidentiality. The professional accountant should consider obtaining legal advice to determine whether there is a requirement to report.

If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible, refuse to remain associated with the matter creating the conflict. The professional accountant may determine that, in the circumstances, it is appropriate to withdraw from the engagement team or specific assignment, or to resign altogether from the engagement, the firm or the employing organization.

INTEGRITY
The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.
A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information furnished recklessly; or
(c) Omits or obscures information required to be included where such omission or obscurity would be misleading.

OBJECTIVITY
The principle of objectivity imposes an obligation on all professional accountants not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others.

A professional accountant may be exposed to situations that may impair objectivity. It is impracticable to define and prescribe all such situations. Relationships that bias or unduly influence the professional judgment of the professional accountant should be avoided.

PROFESSIONAL COMPETENCE AND DUE CARE
The principle of professional competence and due care imposes the following obligations on professional accountants:
(a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and
(b) To act diligently in accordance with applicable technical and professional standards when providing professional services.

Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases:
(a) Attainment of professional competence; and
(b) Maintenance of professional competence.

The maintenance of professional competence requires a continuing awareness and an understanding of relevant technical professional and business developments. Continuing professional development develops and maintains the capabilities that enable a professional accountant to perform competently within the professional environments.

Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.
A professional accountant should take steps to ensure that those working under the professional accountant’s authority in a professional capacity have appropriate training and supervision.
Where appropriate, a professional accountant should make clients, employers or other users of the professional services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact.

CONFIDENTIALITY
The principle of confidentiality imposes an obligation on professional accountants to refrain from:
(a) Disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and
(b) Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.

A professional accountant should maintain confidentiality even in a social environment. The professional accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a close or immediate family? member.
A professional accountant should also maintain confidentiality of information disclosed by a prospective client or employer.
A professional accountant should also consider the need to maintain confidentiality of information within the firm or employing organization.
A professional accountant should take all reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality.
The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer. When a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use prior experience. The professional accountant should not, however, use or disclose any confidential information either acquired or received as a result of a professional or business relationship.

The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate:
Disclosure is permitted by law and is authorized by the client or the employer;
Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course of legal proceedings; or
(ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; and
(c) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the quality review of a member body or professional body;
(ii) To respond to an inquiry or investigation by a member body or regulatory body
(iii) To protect the professional interests of a professional accountant in legal proceedings; or
(iv) To comply with technical standards and ethics requirements.

PROFESSIONAL BEHAVIOR
The principle of professional behavior imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession.

In marketing and promoting themselves and their work, professional accountants should not bring the profession into disrepute. Professional accountants should be honest and truthful and should not:
(a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or
(b) Make disparaging references or unsubstantiated comparisons to the work of others.

A CASE STUDY OF SATYAM COMPUTER SERVICES LIMITED
Satyam scam has been the greatest scam in the history of the corporate world of the India. The case of Satyam accounting fraud has been dubbed by the media as “India’s Enron”. In order to evaluate and understand the severity of Satyam fraud, it is important to understand the factors that contributed to the ‘unethical’ decisions made by the company’s executives. Therefore, it is necessary to examine in detail the rise of Satyam as a competitor within the global IT services market-place. In addition, it is also helpful to evaluate the driving-forces behind Satyam’s decisions under the leadership of Mr. Ramalinga Raju (Chairman). Finally, attempt may be made to draw some broad conclusions and to learn some ‘lessons’ from Satyam fraud.

Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” (Basilico et al., 2012). Satyam won the “Golden Peacock Award” for the best governed company in 2007 and in 2009. From being India’s IT “crown jewel” and the country’s “fourth largest” company with high-profile customers, the outsourcing firm Satyam Computers has become embroiled in the nation’s biggest corporate scam in living memory (Ahmad, et al., 2010). Mr. Ramalinga Raju (Chairman and Founder of Satyam; henceforth called ‘Raju’), who has been arrested and has confessed to a $1.47 billion (or Rs. 7,800 crore) fraud, admitted that he had made up profits for years. According to reports, Raju and his brother, B. Rama Raju, who was the Managing Director, “hid the deception from the company’s board, senior managers, and auditors.” The case of Satyam’s accounting fraud has been dubbed as “India’s Enron”. In order to evaluate and understand the severity of Satyam’s fraud, it is important to understand factors that contributed to the ‘unethical’ decisions made by the company’s executives. First, it is necessary to detail the rise of Satyam as a competitor within the global IT services market-place. Second, it is helpful to evaluate the driving-forces behind Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some ‘lessons’ from Satyam fraud for the future.

EMERGENCE OF SATYAM COMPUTER SERVICES
Satyam Computer Services Limited was a ‘rising-star’ in the Indian ‘outsourced’ IT-services industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. The firm began with 20 employees and grew rapidly as a ‘global’ business. It offered IT and business process outsourcing (BPO) services spanning various sectors. Satyam was as an example of “India’s growing success.” Satyam won numerous awards for innovation, governance, and corporate accountability. As Agrawal and Sharma (2009) states, “In 2007, Ernst ; Young awarded Mr. Raju with the ‘Entrepreneur of the Year’ award. On April 14, 2008, Satyam won awards from MZ Consult’s for being a ‘leader in India in CG and accountability’. In September 2008, the World Council for Corporate Governance awarded Satyam with the ‘Global Peacock Award’ for global excellence in corporate accountability.” Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the centerpiece of a ‘massive’ accounting fraud. By 2003, Satyam’s IT services businesses included 13,120 technical associates servicing over 300 customers worldwide. At that time, the world-wide IT services market was estimated at nearly $400 billion, with an estimated annual compound growth rate of 6.4%. “The markets major drivers at that point in time were the increased importance of IT services to businesses world-wide; the impact of the Internet on eBusiness; the emergence of a high?quality IT services industry in India and their methodologies; and, the growing need of IT services providers who could provide a range of services.” To effectively compete, both against domestic and global competitors, the company embarked on a variety of multi?pronged business growth strategies.

From 2003-2008, in nearly all financial metrics of interest to investors, the company grew measurably. Satyam generated Rs. 25,415.4 million in total sales in 2003-04. By March 2008, the company sales revenue had grown by over three times. The company demonstrated “an annual compound growth rate of 38% over that period.” Operating profits, net profit and operating cash flows averaged 28, 33 and 35%, respectively. Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same period (2003?2009), the company was trading at an average trailing EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of 138.08 INR, Satyam’s stock would peak at 526.25 INR–a 300% improvement in share price after nearly five years (www.capitaliq.com). Satyam clearly generated significant corporate growth and shareholder value. The company was a leading star–and a recognizable name–in a global IT marketplace. The external environment in which Satyam operated was indeed beneficial to the company’s growth. But, the numbers did not represent the full picture. The case of Satyam accounting fraud has been dubbed as “India’s Enron”.

SATYAM TIMELINE
June 24, 1987: Satyam Computers is launched in Hyderabad
1991: Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times.

2001: Gets listed on NYSE: Revenue crosses $1 billion. 2008: Revenue crosses $2 billion.

December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in two companies owned by the Chairman Ramalinga Raju’s sons–Maytas Properties and Maytas Infra. The proposed $1.6 billion deal is aborted seven-hours later due to a revolt by investors, who oppose the takeover. But Satyam shares plunge 55% in trading on the New York Stock Exchange.
December 23: The World Bank bars Satyam from doing business with the bank’s direct contracts for a period of 8 years in one of the most severe penalties by a client against an Indian outsourcing company. In a statement, the bank says: “Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors.” On the day the stock drops a further 13.6%, it is lowest in more than four-and-a-half years.
December 25: Satyam demands an apology and a full explanation from the World Bank for the statements, which damaged investor confidence, according to the outsourcer. Interestingly, Satyam does not question the company being barred from contracts, or ask for the revocation of the bar, but instead objects to statements made by bank representatives. It also does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts.

December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following the World Bank’s critical statements.
December 28: Three more directors quit. Satyam postpones a board meeting, where it is expected to announce a management shakeup, from December 29 to January 10. The move aims to give the group more time to mull options beyond just a possible share buyback. Satyam also appoints Merrill Lynch to review ‘strategic options to enhance shareholder value.’
January 2, 2009: Promoters’ stake falls from 8.64% to 5.13% as institutions with whom the stake was pledged, dump the shares.
January 6, 2009: Promoters’ stake falls to 3.6%.
January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial results. He says the company’s cash and bank shown in balance sheet have been inflated and fudged to the tune of INR 50,400 million. Other Indian outsourcers rush to assure credibility to clients and investors. The Indian IT industry body, National Association of Software and Service Companies, jumps to defend the reputation of the Indian IT industry as a whole.
January 8: Satyam attempts to placate customers and investors that it can keep the company afloat, after its former CEO admitted to India’s biggest-ever financial scam. But law firms Izard Nobel and Vianale & Vianale file “classaction suits on behalf of US shareholders,” in the first legal actions taken against the management of Satyam in the wake of the fraud.

January 11: The Indian government steps into the Satyam outsourcing scandal and installs three people to a new board in a bid to salvage the firm. The board is comprised of Deepak S Parekh, the Executive Chairman of homeloan lender, Housing Development Finance Corporation (HDFC), C. Achuthan, Director at the country’s National Stock Exchange, and former member of the Securities and Exchange Board of India, and Kiran Karnik, Former President of NASSCOM.

January 12: The new board at Satyam holds a press conference, where it discloses that it is looking at ways to raise funds for the company and keep it afloat during the crisis. One such method to raise cash could be to ask many of its Triple A-rated clients to make advance payments for services.

On January 7, 2009, Mr. Raju disclosed in a letter, to Satyam Computers Limited Board of Directors that “he had been manipulating the company’s accounting numbers for years.” Mr. Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent. Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations. For example, the results announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by 97 percent. Mr. Raju and the company’s global head of internal audit used a number of different techniques to perpetrate the fraud. As Ramachandran (2009) pointed out, “Using his personal computer, Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist. He inflated the income statement by claiming interest income from the fake bank accounts. Mr. Raju also revealed that he created 6,000 fake salary accounts over the past few years and appropriated the money after the company deposited it. The company’s global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue. The global head of internal audit also forged board resolutions and illegally obtained loans for the company.” It also appeared that the cash that the company raised through American Depository Receipts in the United States never made it to the balance sheets.

Greed for money, power, competition, success and prestige compelled Mr. Raju to “ride the tiger,” which led to violation of all duties imposed on them as fiduciaries–the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders. According to Damodaran (2012), “The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of corporate social responsibility. It is human greed and desire that led to fraud. This type of behavior can be traced to: greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management; and, greater emphasis on short?term performance.” According to CBI, the Indian crime investigation agency, the fraud activity dates back from April 1999, when the company embarked on a road to double?digit annual growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion dollars.

AFTERMATH OF SATYAM SCANDALS
Immediately following the news of the fraud, Merrill Lynch terminated its engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and PricewaterhouseCoopers (PwC) came under intense scrutiny and its license to operate was revoked. Coveted awards won by Satyam and its executive management were stripped from the company (Agarwal and Sharma, 2009). Satyam’s shares fell to 11.50 rupees on January 10, 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. In the New York Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Thus, investors lost $2.82 billion in Satyam (BBC News, 2009). Unfortunately, Satyam significantly inflated its earnings and assets for years and rolling down Indian stock markets and throwing the industry into turmoil (Timmons and Wassener, 2009). Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. After the Satyam fiasco and the role played by PwC, investors became wary of those companies who are clients of PwC (Blakely), which resulted in fall in share prices of around 100 companies varying between 5?15%. The news of the scandal (quickly compared with the collapse of Enron) sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5%. Shares in Satyam fell more than 70%.

Immediately after Raju’s revelation about the accounting fraud, ‘new’ board members were appointed and they started working towards a solution that would prevent the total collapse of the firm. Indian officials acted quickly to try to save Satyam from the same fate that met Enron and WorldCom, when they experienced large accounting scandals. The Indian government “immediately started an investigation, while at the same time limiting its direct participation, with Satyam because it did not want to appear like it was responsible for the fraud, or attempting to cover up the fraud.” The government appointed a ‘new’ board of directors for Satyam to try to save the company. The Board’s goal was “to sell the company within 100 days.” To devise a plan of sale, the board met with bankers, accountants, lawyers, and government officials immediately. It worked diligently to bring stability and confidence back to the company to ensure the sale of the company within the 100-day time frame. To accomplish the sale, the board hired Goldman Sachs and Avendus Capital and charged them with selling the company in the shortest time possible.
By mid-March, several major players in the IT field had gained enough confidence in Satyam’s operations to participate in an auction process for Satyam. The Securities and Exchange Board of India (SEBI) appointed a retired Supreme Court Justice, Justice Bharucha, to oversee the process and instill confidence in the transaction. Several companies bid on Satyam on April 13, 2009. The winning bidder, Tech Mahindra, bought Satyam for $1.13 per share—less than a third of its stock market value before Mr. Raju revealed the fraud—and salvaged its operations (Dagar, 2009). Both Tech Mahindra and the SEBI are now fully aware of the full extent of the fraud and India will not pursue further investigations. The stock has again stabilized from its fall on November 26, 2009 and, as part of Tech Mahindra, Saytam is once again on its way toward a bright future.