Accountants' Ethics in Shaping the Companys Financial Reality - Assignment Example

?DQ1 An accountant may face several ethical challenges in regards to the revenue recognition of a firm. Accountants must abide by the generally accepted accounting principles at all times. An accountant who holds a license such as a CPA may receive a customer that contracts him for the service of preparing financial statements. The business could ask the accountant to alter the sales number either to inflate or deflate the total revenues. Business owners that want lower earnings are looking for tax savings, while owners that want higher earnings do so to reflect a better financial picture for purposes such as obtaining financing. An accountant working for a public company must also abide by the standards set forth by the Sarbanes Oxley Act (SOX) of 2002 and all other Securities and Exchange Commission (SEC) regulations. There specific ethical challenges accountants may face that can change the revenues of a company. For instance if a company switches from LIFO to FIFO depreciation, it can overestimate or underestimate the revenues of the firm. Whenever a change occurs in depreciation method accountants are supposed to reveal the change in the notes to the financial statements. The accounting profession requires people that have high moral and ethical standards in order to properly serve the best interest of a corporation. DQ2 The financial services industry has been under heavy scrutiny in the United States ever since the government gave the banks a bailout package worth over $700 billion. There are ethical challenges the industry faces in multiple segments of the industry. Prior to 2008 the banking industry acted unethically in many of its decisions because it gave out home loans to people that did not qualify for loans under normal credit criteria. The risky loans created the housing bubble. The housing bubble was one of the main factors that led to the global recession. The supply for housing exceeded the demand. The realtors acted as brokers instead of facilitators and they sold homes to people based on speculative price appreciations. Full compliance with the Sarbanes Oxley Act can help accountants comply with the highest ethical standards possible since SOX covers accountability, internal controls, and prevention of fraud issues. The top executive management teams are subject to prison terms of up to 25 years if the financial statements of public companies have material error or fraud. Overall financial risk can be mitigated in the financial industry by using sound diversification strategies. DQ3 Bankruptcies are not a desirable business outcome, but they often occur in the corporate business environment of the United States and abroad. A lot of bankruptcy cases deal with personal bankruptcy. In 2010 there were over 1.59 million bankruptcies filed in the United States of America (Acainternational, 2011). During a bankruptcy case the plaintiff should act ethically throughout the entire process. Providing the auditors with all the historical financial information unaltered is an example of an ethical act. A lack of ethics during a bankruptcy case is destroying documents to hide critical information such as what occur at Author Anderson during the Enron scandal. Violating the generally accepted accounting principles (GAAP) voluntarily is an unethical act. The liquidation process can lead to unethical behavior. For instance the company that goes bankrupt should not liquidate inventory or equipment at below cost in order to cash the money and keep it themselves instead of turning over the merchandise and equipment to the bank. Acinternational.com (2011). Total Bankruptcy Filings Increased 8% in 2010. Retrieved October 20, 2011 from http://www.acainternational.org/news-total-bankruptcy-filings-increased-8-percent-in-2010-18409.aspx 4 A trick that I think unethical accountants used to alter revenue recognition is by changing depreciation methods and inventory valuation method without properly including a note of the accounting change in the financial statements. For instance if a company changes their inventory practice from LIFO to FIFO this can cause the valuation of the inventory to reflect a different reality that can deflate or inflate the net income of the company. Another technique that can be used by unethical accountants is to directly change the total revenues or sales that a company generated by a fictitious total. 5 It is often tough to discover an accounting fraud because people expect all accountants to act in ethically and socially responsible manners. Unfortunately there are rotten apples in every crop and the accounting profession is not exempt from unethical activity. Things in corporation America in terms of ethical conduct increased a lot after the US Congress in alliance with the SEC passed the Sarbanes Oxley Act of 2002. The Sarbanes Oxley Act increased the credibility and accountability of the profession. The CEO became personally liable for the content of the financial statements of public corporations. 6 I agree with you that the timing of revenues is a tactic that can be used by unethical accountants to change the financial reality of an enterprise. For instance an accountant may not recognize a sale that occurred on December 31 in order to understate the income statement to pay fewer taxes. I believe that the accounting profession requires greater accountability for accountants that do not work for public companies. The FASB has to create new auditing requirements that increase the frequency of accounting audits at non-public corporations. The SEC is doing a good job of monitoring the financial activity of publicly traded companies. 7. Apple favorably benefited in 2010 from the application of new revenue recognition rules. Changes in accounting rules can have a tremendous impact in the financial statements of companies and smart investors can take advantage of these unique opportunities. About 7 years ago I invested in a stock called VTSS. Prior to me investing in the company there was a change in accounting rules that impacted the financial statement positively. The new rule turned the stock from a penny stock to a stock worth over $6 per common stock within six months. The new accounting rules that Apple implemented were EITF Issue 08-1 and EITF Issue 09-3. “The rules change the way companies account for bundled products and service” (Leone, 2010). I believe that managers can create a business environment in which internal controls are integrated in the system in order to increase the accountability of an accounting department. It is extremely important to safeguard the most liquid asset of the firm which is often targeted by internal or external thieves. The most liquid asset of a company is the cash account. Leone, M. (2010). Ahead of the Accounting Curve Too. Retrieved October 21, 2011 from http://www.cfo.com/article.cfm/14485618 8. I agree with you that quarterly financial statements are as important as the annual financial statements released by public companies. Investors pay close attention to quarterly statements. The quarterly statements are often compared to how the firm performed in the same quarter of the previous year. This analytic tactic ensures that seasonality does not disrupt the numbers. For instance companies in the toy industry receive the majority of its sales during the 4th quarter which corresponds to the Christmas season. 9. I agree with the professor that income smoothing is a technique that is often used by accountants to alter financial reality. I once met a friend of mine that studied accounting. He told he had a client that needed to some income smoothing. According to him he believed that doing income smoothing was a sound business strategy. I completely disagreed with him, but we are talking about a person that lacked ethical values as he was also cheating on his wife. 10. I believe that the ethical business values of accountants in the United States are much higher than in other foreign countries. In China businessmen believe that paying bribes is an acceptable business practices. In the United States offering or accepting a bride is completely unethical and could be considered fraud by the court of law. The generally accepted accounting principles utilized in the United States help created a sound ethical framework for accountants in the United States. 11. All bankruptcies are bad for the economy, but when choosing among the three alternatives I would have to state that Chapter 11 is the least damaging to the economy due to the fact that chapter 11 bankruptcy deals with reorganization of debt. Under chapter 7 or chapter 13 all debt is erased and turned into losses. 12. The process of bankruptcy law could be made more equitable by creating a special insurance against bankruptcy. The insurance would pay lender 20% of their total debt in case of bankruptcy. It is better to collect a small portion than nothing at all. The liquidation process could be improved to ensure the assets of a bankrupt company are properly safeguarded. Read More