This paper explores the ethics of accounting and why ethical behavior in accounting professions is important to different stakeholders in business. An accounting scandal will be examined for unethical behavior. New regulations and reforms that have been introduced to help combat unethical behavior will also surveyed. In closing this paper will consider the biblical implications of accounting. Ethics in Accounting
Importance of The Accounting Profession
Accounting is important in business so that management, creditors, investors, potential investors and other consumers of a company’s financial data can make informed decisions. Management of a company uses financial data to budget, analyze trends and plan future operations. Creditors, …show more content…
Incorrect or falsified statements can cause severe economic and legal consequences. Fraudulent accounting is disastrous for all who are involved. According to Kedia and Philippon (2009), “The market-adjusted return over the three days surrounding the announcement of a restatement is associated with an average return of -10%” (p. 2169). The case of the Enron scandal, which is discussed later in this paper, demonstrates this loss on stock prices. A decline in the stock price from above $30 to less than $1 occurred between October 16, 2001 and November 28, 2001 after the company announced a restatement to earnings for the 1997-2001 periods (Kedia & Philippon, 2009, p. 2169). The company and employees who are involved in fraudulent accounting practices can expect to lose their jobs, face civil suits and fines, as well as criminal charges that carry penalties of lengthy jail …show more content…
A once booming energy company had to declare bankruptcy due to unethical accounting practices. Enron saw their stock climb in the years 1999 and 2000 by 56% and 87% respectively. However, within a year Enron’s fell from glory and the stock price dropped less than $1. “Despite [an] elaborate corporate governance network, Enron was able to attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels” (Healy and Palepu, 2003, p. 3). Enron was able to hide billions of dollars in debt from failed deals and projects using special purpose entities and poor financial reporting. One use of controversial special purpose entities used by Enron was to “buy out a partner’s stake in one of its many joint ventures. [Without showing] any debt from financing the acquisition or from the joint venture on its balance sheet” (Healy and Palepu, 2003, p. 11). In addition, Enron “violated accounting standards… and was able to avoid consolidating these special purpose entities. As a result, Enron’s balance sheet understated its liabilities and overstated its equity and its earnings” (Healy and Palepu, 2003, p. 11). This scandal also led to the downfall of the accounting firm Arthur Andersen due to Enron executives pressuring the firm to ignore issues during their audits and the firm shredding
The financial scandals in early 2000s caused the Sarbanes-Oxley Act of 2002 to be created. Enron, WorldCom and the accounting firm, Arthur Andersen, to intentionally mislead their shareholders by exaggerating their profits and understating their expenses. The scandals had raised the importance of internal control for enhancing corporate governance. Therefore, the government established the SOX to protect the interest of the investors and employees and to monitor the companies and auditors.
Take Enron for example, in the later 1990s its stated worth was estimated to been around $70 billion dollars, but after internal review it was found that much of its debt was allocated to falsely created businesses leaving its stated assets to be significantly lower than its actual debt. The scandal was such an issue for all its investors and the government predominantly because its net value decreased radically and by December 2, 2001 the company declared bankruptcy. One of the main issues of this scandal that investigators found was that the company hired auditor, Arthur Andersen, was conspiring with the CEO and CFO to falsify the financial documentation. Had the SOX Act been implemented prior, these falsifications would have been addressed long before the company declared bankruptcy. Of the eleven sections in the SOX Act, Title III Section 802, address what constitutes as fraud and would have held the Enron and Arthur Anderson accountable for submitting proper documents.
Before the Sarbane-Oxley Act of 2002 came into effect in the American economy, most investors and shareholders were left in the dark – most often at the mercy of big corporations whose accounting practices were largely unregulated. The act was a response to the infamous scandal of Enron, WorldCom, Tyco, and Adelphia – all of whom had unethical business practices that caused their shareholders to lose the astronomical amount of investment when their scandals made headlines. The Sarbane-Oxley Act (SOX) requires a business to implement a code of ethics for its employees, especially senior financial officers; it also requires a business rotate its financial auditors on a regular basis. (Orin, 2008) The implementation of a code of ethics aims to
Arthur Levitt, former chairman of SEC, stated “I think the Enron scandal is symptomatic of something much broader than Enron. I think it's symptomatic of a breakdown of the ethical values of business over a period of perhaps 20 years, a gradual erosion of business ethics that brought us to an Enron, but might very well bring us to a whole host of Enrons as we move down the road.” This does seem to be a much larger problem then the collapse itself. Their unethical ways cost Americans millions of dollars, and some their life savings. At first it seemed as though the Kenneth Lay let his pride get in the way of admitting his company was going down
Stan Sewell is consciously and deliberately manipulating his balance sheet to read a much higher value than it should be. Traditionally, under the Generally Accepted Accounting Principles (GAAP), reporting of assets is based on either the historical value or the fair value (Casabona, & Shoaf, 2007). However, Stan Sewell fixed the value of the franchise based on his perception and his desire to benefit more than the franchise was worth. His intention of fixing this value to $500,000 instead of reporting as $50,000 was to deceive his potential investors and creditors. The intent to falsify the facts on the financial information amounts to serious unethical practices.
“Legislation in 1995 was passed shielding companies and accountants from investor lawsuits, and in 2000 regulators were forced to dilute proposed restrictions on accountants” (David Friedrichs, Paradigmatic White Collar Crime Cases For The New Century, Critical Criminology, Pg 117, Para 2). First of two another notable cases was WorldCom, which topped over 11 billion dollars resulting in the company to file for bankruptcy in July 2002, the scandal is now referred to as the biggest accounting scam ever. The second case was Global Crossings, which was accused of falsifying financial reports to hide their losses. The founder, Gary Winnick was not prosecuted for company indiscretions for causing Public Employees Retirement System of Ohio and the State Teachers Retirement System of Ohio in losing 110 million in 2002. All of these cases represent how political society creates the “atmosphere” where these companies believe they can be above the structural level of laws, because create networks where they thrive sometimes illegal.
[Year] [Type the author name] [AUDITING AND ASSURANCE STANDARDS] Answer to Question no 1 (1) The audit threat identified in the said situation is the threat to compliance with the essential principles of auditing. As per this there is an obligation on the auditor to perform only those activities which he is competent to perform being a Member in Public Practice. Thus in this case the fact that Geoff is required to give a speech in the seminar held by LTH so as to secure more investors is acceptable but the fact that it will help Geoff to secure the audit of LTH would create the above mentioned threat. However the best possible way to overcome the said which may create a conflict of interest thus threatening the very independence of the auditor is by making it very clear to the client that he would not speak up anything that is not true and fair.
Recently Wells Fargo’s scandal of creating phony accounts has raised ethical concerns in the corporate world. Wells Fargo employees opened more than two million unauthorized bank and credit card accounts to meet sales projections. The company was charged with huge fines and earned a bad reputation that will take years to rebuild. According to the Deontological perspective on ethics least some acts are morally obligatory.
Executive Summary Lehman Brothers were an investment bank involved in transactions worth billions of dollars and one of the most powerful investment banks in the world. Lehman Brothers collapsed in 2008 following bad investment in the sub-prime mortgage market and used bad accounting practices called Repo 105 transactions to try and cover up the bad assets. This report sets out the use of the fraud triangle when describing the actions which led to the collapse. The pressure applied on the bank, the opportunity due to the lack of regulation to carry out the actions and the ability of the bank to rationalise their decision making.
This chapter used companies, such as Colombia, in the beginning and Seirra Corporation in the four financial statements. This chapter no only explained how it should be done, but it also explained the scandals and some that had scandals. Some of the companies talked about were Enron, WorldCom, HealthSouth, and AIG. Scandals are not good for corporations and businesses because it leads a potential investor or creditor to not trust the financial statements, because they were lies. Since scandals became an idea that was thought to be good, so corporations would get investors or creditors, it led to congress passing what the Sarbanes-Oxley Act (SOX).
The false accounting records were unethical because it means management was enriching themselves. They were getting earnings based on the false availability of funds. They also did this to keep their jobs. When a company is not performing financially well the top positions are the ones usually at risk of being retrenched, as a result of implying the company was financially stable they were protecting their jobs. False accounting also results in duping investors that trust the financial records of the company.
Kenneth Lay, Mr. Jeffrey Skilling and the company CFO, Mr. Andrew Fastow .The management level of Enron Corporation had misconduct the code of ethics and fail to performing the duties of a corporation which is telling the truth of the situation of a corporation .Instead , they tried try to hide the truth of their financial status and create a false prosperity situation and make the public believe on them in order to support their shares prices . The misconduct of code of ethics by the management level by Enron corporation has led to the another question – The ultimate responsibility of a corporation towards society ? The ultimate responsibility of a corporation is to gain profit or become a stable economic unit ?
Ethical issues in accounting and finance. Summary This task analysis the issue of ethics in accounting and finance as discussed in the International Journal of accounting and finance. Currently, ethics of any firm is an important topic due to the numerous scandals that have taken place in different countries which have resulted in damage to the economy and society.