ACCA’s 5 ethical principles of accounting - Top Study Guide

Integrity.
Objectivity.
Professional competence and due care.
Confidentiality.
Professional behaviour.

The Association of Chartered Certified Accountants (ACCA) is a leading international accountancy body whose ethical framework is foundational for the practice of professional accountancy. The ACCA’s framework is built around five ethical principles designed to guide accountants and finance professionals in their conduct and decision-making processes. Understanding these principles is vital for students of IB Business & Management, as they apply universally across the business world, influencing practices from small enterprises to multinational corporations. Below, we explore each of these principles in detail, illustrating their application with industry examples.

Integrity

Definition: Integrity demands honesty and straightforwardness in all professional and business relationships. Accountants must not be associated with reports, returns, communications, or other information where they believe the information contains materially false or misleading statements, includes statements or information furnished recklessly, or omits or obscures information required to be included where such omission or obscurity would be misleading.

Industry Example: Enron’s collapse in 2001, due to fraudulent financial reporting, underscores the catastrophic consequences of lacking integrity. In contrast, companies like Patagonia, which transparently reports its environmental impacts alongside financials, exemplify integrity, building trust with stakeholders.

Objectivity

Definition: Objectivity requires accountants to not allow bias, conflict of interest, or undue influence of others to override professional or business judgments.

Industry Example: An audit firm assessing the financial statements of a major client must not let any personal or financial relationships with the client cloud their judgment. The collapse of Arthur Andersen alongside Enron highlights the dangers when objectivity is compromised. In contrast, firms like Deloitte and PwC emphasize independence and objectivity in their audit and consulting practices, often declining lucrative consulting jobs to avoid conflicts of interest.

Professional Competence and Due Care

Definition: Accountants have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service. They must act diligently in accordance with applicable technical and professional standards.

Industry Example: The adoption of International Financial Reporting Standards (IFRS) across many countries requires accountants to continually update their knowledge and skills to provide accurate financial reporting. Companies like IBM provide extensive training and professional development opportunities to ensure their finance teams uphold the highest standards of competence and care.

Confidentiality

Definition: Accountants 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.

Industry Example: When HP acquired Autonomy in 2011, the confidentiality of financial information and due diligence reports was paramount. Accountants and advisors involved were under strict obligations to maintain confidentiality, demonstrating how business transactions rely on the discretion of financial professionals.

Professional Behaviour

Definition: Accountants should comply with relevant laws and regulations and should avoid any action that discredits the profession. This includes actions both in their professional work and in their personal lives that may impact their professional standing.

Industry Example: The Volkswagen emissions scandal, where vehicles were programmed to cheat on emissions tests, not only violated legal and regulatory standards but also significantly harmed the professional reputations of involved executives and auditors. Contrastingly, companies like Ernst & Young have established rigorous compliance and ethics programs to guide professional behavior in complex global regulatory landscapes.

Conclusion

The ACCA’s five ethical principles of Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour form the bedrock of ethical conduct in accounting and finance. These principles are not just theoretical concepts but are deeply embedded in the practices and policies of reputable firms worldwide. They serve as a guide for making ethical decisions in the face of complex business challenges. For IB Business & Management students, understanding and applying these principles is essential for navigating the modern business environment ethically and successfully. Through industry examples ranging from Enron and Arthur Andersen to Patagonia and Deloitte, we see the profound impact of these principles on businesses, economies, and society at large.

Frequently Asked Questions about Accounting Principles

What are Accounting Principles? ▼

Accounting principles are a set of rules and guidelines used to prepare and present financial statements. They ensure that financial reporting is consistent, comparable, and understandable, allowing users (like investors, creditors, and management) to make informed decisions. These principles provide a framework for how economic events should be recognized, measured, and disclosed.

What is GAAP? What is the purpose of Generally Accepted Accounting Principles? ▼

GAAP stands for Generally Accepted Accounting Principles. It is the common set of accounting principles, standards, and procedures that companies use to compile their financial statements. In the United States, GAAP is primarily set by the Financial Accounting Standards Board (FASB).

The purpose of GAAP is to standardize financial reporting, making it transparent, consistent, and comparable across different companies. This helps prevent misleading financial practices and allows stakeholders to accurately assess a company's financial health.

What are some basic or fundamental principles of accounting? ▼

While there isn't a universally agreed-upon fixed number (like exactly 4, 5, 7, or 10), some fundamental principles form the basis of accounting frameworks like GAAP:

Going Concern Principle: Assumes a business will continue to operate indefinitely unless there's evidence otherwise.
Monetary Unit Principle: Financial transactions are recorded in a stable monetary unit (like USD), ignoring inflation effects.
Economic Entity Principle: The business is treated as separate from its owners and other entities.
Time Period Principle: The life of a business is divided into artificial time periods (e.g., months, quarters, years) for financial reporting.
Cost Principle (Historical Cost): Assets are recorded at their original cost when acquired.
Revenue Recognition Principle: Revenue is recognized when it is earned and realized or realizable, regardless of when cash is received.
Matching Principle: Expenses should be recognized in the same period as the revenues they helped generate.
Full Disclosure Principle: All information significant enough to influence the decisions of users of financial statements should be included.
Conservatism Principle: When in doubt, accountants should choose the method or estimate that is least likely to overstate assets and income.

What is the Cost Principle of accounting? ▼

The Cost Principle, also known as the Historical Cost Principle, states that assets should be recorded at their original cost at the time of purchase. This cost includes all expenses necessary to get the asset in place and ready for use. This principle emphasizes objectivity and verifiability, as the original cost is based on a past transaction.

What is the principle of Accountability in business/accounting? ▼

While not a core GAAP principle regarding transaction recording itself, accountability is a crucial ethical and managerial principle related to accounting information. It means being responsible for one's actions and decisions, particularly those involving financial resources. In accounting, it ensures that individuals and departments are answerable for their financial performance and stewardship of assets, often supported by reporting systems like responsibility accounting.

Is 'Principles of Accounting' a difficult subject? ▼

Whether 'Principles of Accounting' (or Accounting 1/Financial Accounting principles) is difficult depends on individual learning styles and background. It involves understanding concepts, rules, and logic rather than complex mathematics (basic arithmetic is used). It requires careful attention to detail and consistent practice. Many students find it challenging initially due to the new terminology and framework, but with focused study, it is generally manageable.