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IMPACT OF ACCOUNTING ETHICS ON THE QUALITY OF FINANCIAL REPORTS

OF BANKING FIRMS

IMPACT OF ACCOUNTING ETHICS ON QUALITATIVE CHARACTERISTICS OF

FINANCIAL REPORTING FOR LISTED FIRMS

Abstract

This study will assess the impact of professional accounting ethics on the qualitative

characteristics of financial reporting for listed firms on the Ghana Stock Exchange (GSE),

specifically Cape Coast. Data for the study will be collected from secondary sources from

sample of 10 listed firms on the GSE. The data collected will be analyzed with means score and

standard deviation. This study will help us analysis and discover among others the influence of

professional accounting ethics on the qualitative characteristics of financial reporting. The

researcher wants to carry on this study to know it effects of the confidents of investors,

borrowers, other users of accounting information and the economy at large. The result on this

study will enable employers to either attach more importance on training professional

accountants for the task ahead before being deployed to the field and monitoring their

professional accounting ethics while on the job field or otherwise.

Key words: Professional ethics, Accounting ethics, qualitative characteristic, financial reporting.

INTRODUCTION

Background to the Study

Code of professional ethics is often established by professional organizations to help

guide members in performing their job functions according to sound and consistent ethical

principles. The history of the need for accountants to establish high ethical standards began with
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the failure of the technology bubble followed by the collapse of Eron, WorldCom and Arthur

Anderson among others (Rockness & Rockness, 2010). Accountants have therefore established

professional accepted standards of personal and business behavior, values and guiding principles.

Key qualities which appear in codes of ethics of professional bodies include independence,

integrity, objectivity, competence and judgment. The Institute of Chartered Accountants in

England and Wales introduction to its Guide to Professional Ethics includes a list of five

fundamental principles which either expressly or clearly implies all of these qualities, along with

other related qualities such as honesty, fair dealings, truthfulness, courtesy, skill and diligence

(Gowthorpe, 2005).

The measures ensure that accountants have ethics education to improve chances that

practicing accountants make ethical decisions when confronted with difficult choices. Codes of

professional conduct are to be strictly adhered by accounting professionals as a need to curtail

the wide spread of corruption in the society and the failure of organizations in every part of the

world which seems to be the order of the day. Since financial reporting forms the basis for

economic decision making, the financial reports should be based on certain fundamental qualities

such as relevance, understandability, faithful representation, comparability, timeliness, and

reliability for various users to understand the content of the report. The accountant is responsible

for the consequences of his moral choices hence, an accountant who commits fraud does not only

ruin his own moral being but also harms the interests of other members of the society who

depend on his report (Catacutan, 2006). Therefore, providing high quality financial reporting

information is important because it will positively influence capital providers and other

stakeholders in the making investment, credit and similar resource allocation decisions

enhancing overall market efficiency.

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Statement of the Problem

The Code of Corporate Governance (2011) provided for the composition of an ethics

committee in an organization where the committee is responsible for deliberating on ethical

issues as well as upholding ethical standards in the organization. This has not really yielded the

right result as intended as some of the scandals over the past decade have been traced to ethical

issues where most times management and auditors compromised integrity for personal and

selfish gain to the detriment of the organization. Enron manipulated its statement through off

balance sheet financing because they lacked independence from senior executives, Cadbury

overstated its audited financial statements, African petroleum concealed its indebtedness to the

tune of 22 billion, the financial sector crisis also witnessed few years ago also revealed that the

banks connived with the auditors to issue a true and fair view. A critical look at all these cases

show that they all were as a result of the violation of ethical practices, hence there’s need to

critically appraise ethical issues in an organization and how they affect financial reporting

quality

Significance of the Study

Objective of the study

The overall objective of this study is to identify and examine the impact of accounting ethics on

the qualitative characteristics of financial statements of stated firms in Ghana. However, this

study seeks to attain these specific objectives;

1. To examine the effects of accounting ethics on disclosure of items in the financial statement.

2. To ascertain the effects of accounting ethics on the objectivity and authenticity of financial

statement of stated firms in Ghana.

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3. To discover the impact of impact of accounting ethics on the integrity of financial statements.

Research questions
1. What is the effect of accounting ethics on disclosure of items in the financial statement?

2. To what extent does accounting ethics affect the objectivity of financial statement of stated

firms in Ghana?

3. How does accounting ethics affect the integrity of financial statements?

LITERATURE REVIEW

This section reviews and analyses the empirical works, articles, journals and researches carried

out by other researchers on accounting ethics and qualitative characteristics of financial

statement for stated firms.

Ethics in Accounting Profession

“Ethics” is a term subject to numerous, sometimes Conflicting, Intergradations (Luoma,

1989). According to Ogbonna and Appah (2011), Ethics are the moral principles that an

individual use in governing his or her behavior. It is the personal criteria by which an individual

distinguishes right or wrong”. In Ogbonna’s view, when we talk about ethics and ethical values,

we mean our concern about things, which we think, say and/or practice that may not necessarily

violate the rules of the organization or infringe the law of the land or amount to outright crime or

felony, but which borders on our sense of morality, our sense of right and wrong. It concerns

itself with issues like conflict of interest, insider’s dealings, compromising integrity, objectivity,

independence, confidentiality, disclosure of official secrets and destruction of official documents

for financial benefits and other similar acts that are against moral principles and ethical

standards.

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Nwagboso (2008) argues that ethics or morality as matters of good and evil, right and wrong and

subscribes to the fact that “we are living today in an ethical wilderness”. He believes that ethics

is in ferment and chaos among all people. Ethical theories is the substantive proposals regarding

those consideration that would determine morally acceptable conduct and applied ethics is the

deliberation related to a specific field of enquiry. Examples include ethics in business, public

service and general professional ethics. According to Jenfa (2000) and Nwagboso (2008),

professional ethics provides accountants with certain advantages such as determining the

professional posture he should adopt if he is to succeed and determining the prosperity of his

conduct in his professional relationship. Professional ethics has significant position in the

organization of that federation of Accounting Professions (FAP) and in Australia, ethics are at

present the responsibility of an accounting Professional and Ethical Standards Board limited

(Gaffikin, 2009). Ogbonna and Appah (2011) investigated the effect of ethics on financial

reporting quality in Nigeria using a sample of 123 accountants. The study found out that ethical

compliance by the accountant positively and significantly affects the quality financial reports.

Ethical Standards in the Accounting Profession:

Key qualities which appear in the codes of ethics of professional bodies include

independence, integrity, objectivity, competence and judgment. (ACCA,2016)

Nwagboso (2008) says that accounting is a profession that rests heavily on the need to exhibit a

high sense of accountability and stewardship, hence the emphasis that all members be guided by

professional code of conduct. Aguolu (2006), Jenfa (2000), Okezie (2008), Nwagboso (2008),

Nwanyanwu (2010) and Ogbonna and Appah (2011) provided the fundamental guidelines

applicable to all accountants. These guidelines include:

Integrity: This is the quality of being honest and having strong moral principles. It

implies not merely honest but fair dealing and truthfulness. This principle of integrity imposes an

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obligation on all accountants to be straight forward and honest in professional and business

relationships.

Objectivity: The principle of objectivity imposes the obligation on all professional

accountants to be fair, intellectually honest and free from conflicts. This principle requires four

basic needs of credibility, professionalism, quality of service and confidence.

Professional competence: A professional accountant, in agreeing to provide professional

services implies that he is competent to perform the services. Accountants should refrain from

agreeing to perform professional services which they are not competent to carry out unless

competent advice and assistance are obtained.

Confidentiality: A professional accountant should respect the confidentiality of

information acquired during the course of performing professional services. They

should not use or disclose any such information without proper and specific authority.

Independence: Independence means having a position to take an unbiased viewpoint in

the performance of professional assignments. Accountants must not only maintain an

independent attitude in fulfilling their responsibilities, but the users of financial reports must

have confidence in that independence.

Technical standards: Professional services should be carried out in accordance with the

relevant technical and professional standards. The services should conform to the technical and

professional standards of relevant accounting bodies and other legislation.

Financial reporting according to Nzotta (2008) is a critical issue which affects the decision

making process of various individuals, corporate bodies, investors and policy makers. Glautier

and Under down (2001) says that the primary objective of financial reporting is to communicate

economic measurement of an information about resources and information about the resources

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held by entity and performance of the reporting entity, useful to those having right to such

information.

Belkaoni (2002) noted that qualities of financial reports include relevance,

understandability, reliability and completeness, Objectivity, timeliness and comparability. Best et

al (2009) observed that the fundamental qualitative characteristics (that is, relevance and faithful

representation) are most important and determine the context of financial reporting information.

The enhancing qualitative characteristics (that is understand ability, comparability, verifiability

and timeliness) can improve decision usefulness when the qualitative characteristics are

established. To assess the quality of financial reporting, various measurement methods have been

used. The most widely used in prior research to assess the quality of financial reports include

accrual models, value relevance models, research focusing specific elements in the annual report,

and methods of operationalizing the qualities characteristics.

The Nature and Scope of Financial Reporting

Relevance: Financial information is relevant if it is capable of making a difference

in the decisions made by users. Financial information is capable of making a difference in

decisions if it has predictive value, confirmatory value, or both.

Faithful presentation: A faithful representation of economic phenomena would have

three characteristics. It would be complete, neutral, and free from error. The IASB intends to

maximize those qualities to the extent possible.

Understandability: Information is made understandable by classifying, characterizing

and presenting it clearly and concisely.

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 Comparability: Information about a reporting entity is more useful if it can be

compared with similar information about the same entity for another period or another date

and with similar information about other entities.

Timeliness: Timeliness means having information available to decision-makers in time

to be capable of influencing their decisions. Normally, the older the information is the less useful

it is.

RESEARCH METHOD

The research method to be adopted for this study is the descriptive research design as it

enables the research elicity. Information from the respondents on the subject matter under

investigation. A diagnostic analysis and survey research shall be particularly used as diagnostic

reasons for outcomes and specifically focuses on the beliefs and feeling respondents have about

and toward specific issue. However, survey research will also be adopted for the reason that

there is a need to gather evidence from the various Banks operating in the Banking firm which

we have decided to survey. The term survey is most frequently to refer to a way of collecting

evidence from individuals (Schevern, 2004. P.9)

Research Design

According to Ogolo (2007) research design is an outline that serves as a useful guide to

the researcher in his work, and in his effort to generate data for the study. It describes the

process, and methods and procedure for data and information gathering. The design of this study

is done in such a way to covert as necessary and relevant data, records and information that

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would help in attaining the objectives, and help us to test the hypotheses, to control variances and

minimize error. Research design is the strategy, plan and structure of conducting a research

project ( Kweit and Kweit, 1981). Research instruments should be valid and reliable (Marczyk et

al. 2005). To measure what an instrument is expected to measure and perform as is planned to

perform is known as validity. Validation is a process that consist of a collection and analysis of

data that assesses the accurateness of an instrument. Validity can be measured base on construct

validity and content validity.

Validity construct centers on the structure of the survey. The researcher ensured that the entire

questions of the survey were clear and brief. Furthermore, closed ended questions will be used to

make it easier for participants to complete questionnaires. Content validity is also defined as the

appropriateness of what an instrument entails. The measures, that is, questions or observation

logs cover the purpose of the study. (Saunders et al. 2009) describes techniques used in

collecting data as measures taken in overseeing instruments and data collections from topics

under study. Arrangements will be made with research participants through telephone and

personal visits to the organizations.

Data Collection

The primary data for the study will be generated through the administration of questionnaire

conducted to evaluate ethical accounting standards on the quality of financial reports of banks in

Ghana (cape coast). On 50 respondents from the sample of 10 banks (commercial bank, Zenith

bank, Prudential bank, fidelity bank, ADB, Barclays bank, HFC Bank, Data bank, Standard

Chartered, GN bank) from accessible population 15 banks in the Cape coast in the central region.

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However, a secondary data based on the examination of documentation reports from

authoritative bodies like ICAG, ACC, others alike, will be principally valuable in this esteem in

that, it aids to structure and contextualize the impact of professional accounting ethics on the

quality of financial reports.

Research Ethics

Ethical aspect of this research will not be taken for granted. The consent and approval of all

respondents shall be seek before any data and information will be retrieved from them. They

shall be assured of confidentiality of their personality and any data given us and shall be used for

the purpose of this research only.

SCOPE OF THE STUDY

This study will focus on the effect of ethics on financial reporting quality. Geographically, this

study will be limited to banking firms operating in Ghana. The study focused on firms operating

in Cape coast, Central region. The population from which we seek to collect the relevant data

and information will be staffs (tellers, inquiry desk), Internal Auditors, management, Accounts

and Finance officers in the aforementioned banks in Cape Coast, Central region.

ORGANIZATION OF THE STUDY

To achieve this objective, the study is divided into five sections or chapters. The second section

examines relevant theoretical and empirical literature on ethics and financial reports; the third

section examines the materials and methods used in the research.

TIME SCALE

TASK TO BE COMPLETED

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 Idea formulation and introduction 19/02/2018

Background 24/02/2018

Complete literature research, research questions and research 26/02/2018

objectives

Submission of research proposal 1/03/2018

Make arrangements for data collection

Research and reviewing of literature

Secondary research and analysis

Draft dissertation

Revised draft of dissertation

Final submission of dissertation

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Sidik, MH & Rahim, RA (2012), The benefits and challenges of financial reporting standards

in Malaysia: accounting practitioners‘ perceptions‖, Australian journal of basic and applied

sciences.

Antwi, KG (2016), Adoption of international financial reporting standards in developing

countries - the case of Ghana, university of applied sciences. (3rd Ed).

Adeyemi & Fagbemi (2011). The Perception of Ethics in Auditing Profession in Nigeria. Journal

of Accounting and Taxation

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Aguolu, O. (2016). Ethics and integrity in the accounting profession. Nigeria. Account. (5th Ed)

Ajibolade, S.O. ( 2008). A Survey of the Perception of ethical behaviour of future Nigerian

accounting Professionals. Nigeria. Account.,

Ogbonna, G.N. & E. Appah, ( 2015). Ethical Compliance by the Accountant on the Quality of

Financial Reporting and Performance of Quoted Companies in Nigeria. Asian Journal of

Business and Management, 2nd Ed

ACCA. (2016). The five fundamental ethics principles: Retrieve from www.accaglobal.com.

Code of ethics and conduct: Retrieve from www.accapolska.pl

ICAG. (2013). Code of ethics for professional accountants content: Retrieve from www.ifac.org

Haruna N., & Tweneboah E. S. (2017). Analysing the critical effects of creative accounting

practices: www.mpra.ub.uni-muenchen.den

Yinka M. S.,Jide I.,& Emmanuel I. C.(2015).Unethical accounting practice and financial

reporting quality: Retrieve from https://hrmars.com/hrmars_papers/articlae

Awuku, A. A. (2015). IFRS adoption: costs and benefits for companies listed on Ghana club 100

Retrieved from ir.knust.edu.gh.

Ogbonna. G.N. & Ebimobowei A. (2012). Effect of Ethical Accounting Standards on the Quality

of Financial Reports of Banks in Nigeria. Current Research Journal of Social Sciences

4(1): 69-78

Accounting and Auditing-World Bank document and Report: document.worldbank.org

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