Accurate and reliable financial reports are crucial for creating trust and confidence among stakeholders.
Ethical accounting is necessary for the smooth operation of businesses. It helps companies follow legal standards, reducing the risk of legal actions and penalties while directly affecting an organization's reputation and credibility.
Let’s dive into how these factors contribute to maintaining ethics in accounting and how accounting software can help manage and organize these features.
Integrity in financial reporting
Ethical accounting practices help prevent fraud and financial misconduct, protecting the organization's reputation and economic stability. Let's go into more detail on how.
Trust and confidence
Financial reports must be reliable and accurate because they supply vital information to stakeholders who make informed financial decisions. Providing dependable data regularly helps build and maintain the trust and confidence of all stakeholders, and having accurate financial statements builds credibility and is more likely to attract new customers and investors.
Legal compliance
Complying with local and international regulations and laws is also essential in accounting. Accounting teams have a legal and moral responsibility to follow generally accepted accounting principles (GAAP) and other regulatory requirements. These practices help accountants minimize the potential risk of penalties and legal ramifications.
Prevention of fraud
Financial reports that have been manipulated or subject to misconduct in any way hurt not only the company's financial strength but also its reputation. This is why ethical accounting practices are necessary to ensure that reports are free from manipulation and accurately represent the organization's current financial standings.
The importance of ethical accounting practices and reporting was further stressed when the US government created the Sarbanes-Oxley Act in 2002. This act was made out of necessity to reinforce the importance of reliable and transparent financial reporting while holding organizations responsible for the contents of their financial statements.
The Sarbanes-Oxley Act
Due to several accounting scandals involving major corporations in the early 2000s (Enron—2001, WorldCom—2002, Tyco—2002), a US federal law called the Sarbanes-Oxley Act of 2002, or SOX, was created. The main purpose of this law is to protect investors and other stakeholders by ensuring and improving the reliability and accuracy of corporate financial reporting.
The main components of this law are:
- Holding company executives responsible for the accuracy of financial statements and any fraud or manipulation of said reports
- Requiring organizations to maintain reliable internal control structures for reporting and auditing
- Imposing hefty penalties for any fraudulent activity, including jail time for those individuals involved
- Protecting any whistleblowers to encourage employees to speak up without the fear of retaliation
Luckily, there is an abundance of software features available to help accounting teams organize and maintain ethics in their reporting.
The role of accounting software in ethics
To maintain the trust and confidence of an organization's shareholders, accounting software can offer automated reporting that minimizes human involvement, creating more accurate and reliable reports. The software can also provide data visualization tools using real-time data to make it easier for users to make informed decisions and present their findings to stakeholders.
Accounting software often has built-in compliance checks to validate that all financial activities are legal and follow any requirements. It also maintains audit trails to ensure standards are met and can automatically update with the latest accounting regulations to maintain GAAP compliance. These features can help companies stay legally compliant.
Similar to the components of SOX, the fraud prevention features in some accounting software help maintain internal controls of accounting departments by requiring many levels of authorization for transactions, as well as automating continuous audits to quickly find any discrepancies. This software also has systems in place to allow users to anonymously report any misconduct or unethical behavior.
AI accounting features have yet to prove themselves
As mentioned above, accounting software contains several features that help with compliance and ethics. These include some newer AI-powered features that assist with report generation, tax compliance, and fraud detection.
At G2, users can score these features from 1 to 7, and data from these authentic accounting reviews tells us that AI-backed compliance features score lower than the category average of 5.72, as seen below.
However, because the use of AI is fairly new and constantly evolving and improving, the AI feature questions have received a much lower average response count than non-AI features (207 vs. 7,306). I expect the response rate of AI features to exponentially increase in the near future, which will give us a better understanding of how and if these features are improving to better fulfill users' needs.
The future of AI in ethical accounting
A reliable financial and accounting system starts with dependable and trustworthy data. Having ethical practices in place helps maintain this reliable data, which in turn leads to confidence and trust with stakeholders, ensures legal compliance, and helps prevent fraud.
I believe that with the addition and constant improvement of AI-powered accounting features, accounting departments and organizations as a whole will have more resources than ever to successfully manage their finances with integrity and honesty, which is a win-win for everyone.
Learn more about the impact of technology on accounting software!
Edited by Jigmee Bhutia
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