Deficiency of Ethical and Professional Accountants - Case Study Example

Running Head: Contemporary issues in Accounting and Finance Contemporary issues in Accounting and Finance [Institute's Name] Contemporary issues in Accounting and Finance Since few years, the world is confronting enormous amount of adverse effects, and is witnessing economic recession in almost every part of the globe, especially in the United States that has been the source of economic effects on other parts of the globe. In the result, governments and associated organizations are putting efforts to minimize the effects of economic crisis; however, at the same time, there has been a huge debate regarding the causes and risk factors associated with this huge economic crisis that has resulted in losses of billions of dollars globally, and many companies are at the risk of bankruptcy. In this regard, experts and economists (Manning & Nothwehr, pp. 1, 2008) have carried out investigations and researches to analyze the factors that made it possible for the crisis to rip off big names like General Motors, etc. In particular, there has been disparity between outcomes of such researches, as some experts (Aitken-Davies, 2008) blamed unprofessional practices of providing illogical remuneration to CEOs that resulted in huge losses to companies, whereas, some blamed lack of corporate governance that inclined the organizations toward the economic recession. In brief, economists (Norton & Porter, pp. 56-63, 2009) have blamed organizations for considering short-term profits of the company to pay huge rewards and compensation to CEOs and directors that is a significant form of excessive amount of risk-taking by the organizations, causing long-term financial issues. Despite of different claims and blames, analysis of the studies (Saudagaran, pp. 21-25, 2009) has indicated that everything goes down to one end that is accounting and its principles. A huge number of studies (Sorkin, 2008) have indicated that there has been deficiency of ethical and professional accountants in the profession that were involved in manipulating accounting rules and metrics on short-term basis that resulted in a financial issue for the organizations, as well as the banking sector on long-term basis. For instance, a popular accounting rule associated with this debate is FAS 157 that is confronting criticism since the commencement of debates related to the causes of economic crisis. Economists believe that this specific rule inclined accountants to exaggerate the financial matters in front of the national banks that contributed adversely in the promotion of economic recession. In addition, a number of experts (Manning & Nothwehr, pp. 1, 2008) from the banking sector consider the rule as a very dangerous principle that resulted in the representation of losses of billions of dollars, whereas, the organizations never lost it. In an article of the New York Times, author wrote, "FAS 157 represents the so-called fair value rule put into effect by the Federal Accounting Standards Board, the bookkeeping rule makers. It requires that certain assets held by financial companies, including tricky investments linked to mortgages and other kinds of debt, be marked to market. In other words, you have to value the assets at the price you could get for them if you sold them right now on the open market" (Sorkin, 2008). Besides FAS 157, a few experts have indicated similar objective of mark-to-market rule, FAS 115 that regulates the organizations to perform the following tasks. Although it is a good principle, but it allows companies to manipulate things in a tricky manner, and this possibility of manipulation indicates the intensifying capability of this accounting principle to encourage frauds and subsequently, recessionary period around the world. Experts (Sorkin, 2008) have indicated that big names like CitiGroup, Lehman Brothers, etc used this accounting principle to show their exposure at fifty percent, whereas, it was only near to fifteen percent. In this regard, besides unethical practices involving personal benefits of accountants and CEOs, a few accounting principles did contributed in igniting the period of economic crisis globally. Moreover, studies have indicated that in the accounting profession, experts (Manning & Nothwehr, pp. 1, 2008) have identified lack of ethical professionalism that enabled accountants to benefit from loopholes. Particularly, economists (Beenen & Pinto, pp. 275-289, 2009) have identified three major causes of accounting frauds since few years that are the major factor of economic recession globally. Firstly, organizations are confronting huge difficulties in finance sector that results in the inclination of CFOs to involve in the misappropriation of funds. Besides, many accounting rules and principles allow their manipulation in a legal manner that indicates the opportunity of acquisition of personal advantages. Thirdly, an innovative practice involves rationalization of fraud practices in the accounting profession due to the implementation of IT applications. In specific, since the last decade, majority of organizations have implemented computational accounting that has many loopholes and allow desperate accountants to benefit from their illegally. In the result, such loopholes in the financial computing have been another significant reason associated with accounting profession that gave birth to huge number of white-collar criminals in the field (Beenen & Pinto, pp. 275-289, 2009). In other words, debate (Pozen, pp. 44-47, 2009) related to the accounting and economic crisis has pointed out that although there is no dreadful thing about the notion of fair value accounting, however, implementation of this accounting concept has become a controversial and challenging issue in this era of economic recession. Conclusively, the paper has discussed some of the significant aspects of the accounting profession that are confronting huge criticism due to their possibilities of being major contributors of the economic recessionary period that has resulted in huge losses of billions of dollars in different parts of the globe. Although many economists and experts (Duska, pp. 23-25, 2003) blamed different aspects of the accounting profession, however, it is an observation that such understanding of risks factors existing in the field will enable the organizations to avoid similar situation in the future. In this regard, it is very imperative that concerned authorities should take significant steps to eliminate loopholes and existence of white-collar criminals in the field of accounting that will play a crucial role in minimizing the effects of global economic crisis. It is an expectation that the paper will be beneficial for students, teachers, and professionals in better understanding of the topic. However, future researches will be more facilitating in terms of providing further evidence that will be helpful in identifying concrete risk factors that caused the economic crisis. References Aitken-Davies, Richard. (2008). "Accountable Crises." The Guardian. Issue of October 06, 2009. Retrieved on December 17, 2009: http://www.guardian.co.uk/commentisfree/2008/oct/06/executivesalaries.banking Beenen, G. & Pinto, J. (2009). "Resisting Organizational-Level Corruption: An Interview with Sherron Watkins." Academy of Management Learning & Education. Volume 8, Issue 2, pp 275-289. Duska, Brenda Shay. (2003). Accounting Ethics. Wiley-Blackwell. Manning, Tim & Nothwehr, Erin. (2008). Regulatory Failures and Insufficiencies that Contributed to the Financial Crisis and Proposed Solutions. University of Iowa Press. Norton, Curtis L. & Porter, Gary A. (2009). Using Financial Accounting Information. Cengage Learning. Pozen, Robert C. (2009). "Is It Fair to Blame Fair Value Accounting for the Financial Crisis'" Harvard Business Review. Issue of November 2009. Retrieved on December 17, 2009: http://hbr.org/2009/11/is-it-fair-to-blame-fair-value-accounting-for-the-financial-crisis/ar/1 Saudagaran, Shahrokh M. (2009). International Accounting. CCH. Sorkin, Andrew Ross. (2008). "Did an Accounting Rule Fuel a Financial Crisis'" The New York Times. Issue of July 01, 2008. Retrieved on December 17, 2009: http://dealbook.blogs.nytimes.com/2008/07/01/blaming-the-bean-counters/ Read More