What are the negative effects of accounting scandals on the government - Essay Example

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The scandal involves a range of illegal and unlawful practices that relate to misrepresentation of facts or intentional deception. The entity or individual who is involved in…
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General Business: Effects of Accounting Scandals on the Government Dana Al-Misned 01517 Qatar English 203-113 June 4, Mr. TobiasChristopher Lee
General Business: Effects of Accounting Scandals on the Government
Accounting scandal is an international phenomenon that has affected many countries and economies. The scandal involves a range of illegal and unlawful practices that relate to misrepresentation of facts or intentional deception. The entity or individual who is involved in accounting scandals always makes a conscious misrepresentation of figures to access unauthorized benefits. In addition, this form of fraud can take a different dimension where an entity with vested interests may even manipulate a potential government business or procurement to get money or goods. Many governments have lost a lot of money on unscrupulous individuals; a fact that calls for a need for developing stringent control procedures that do not put the state employees in positions of committing fraud (Byun & Roland-Luttecke, 2014).
According to Ball (2009), financial reporting is one of the root causes of accounting scandal. The rationale for financial reporting is to give financial information about entities that may be of use to the potential lenders, investors, creditors, and the government to guide it in decision-making. The state decisions may include buying or holding equity or providing guidance on whether to borrow money for development. Many cases exist where organizations and government officials exhibit discredited behavioral patterns.
Primarily, there are three categories of people in an organization who engage in financial scandals. The dishonest individuals range from chief financial officers who always conceal their true picture and the performance of the government department to maintain their status and to keep aside personal income for their benefits. The middle and lower level of management always falsify information related to their area of work or responsibility (Enofe, 2010). The main aim of engaging in this form of financial accounting is to hide their poor performance abilities or to gain undeserving bonuses, which incurs losses to the government.
At the organizational level, the institution can give false financial statements for getting access to credit facilities or inflating the prices of properties that the government is planning to sell. Whereas many governments have reviewed their financial auditing systems to tame accounting fraud, many frauds that have arisen from manipulated audit results are great indicators that financial auditing cannot be solely relied on as a fraud detection strategy. Fraudulent reporting, which is the major form of financial scandal can have negative consequences that may hurt not only the government but also a reduction in the confidence of the public in the capital market. In the United States, for instance, Ball (2009) highlights that occasional high profile cases of fraud in financial reporting has raised concerns about the credibility of the country’s financial management system.
At the organizational level, financial fraud hurts many institutions financially, psychologically, and operational wise. While the loss of financial asset may be significant, the impact of fraud on a government department may be felt for a long time. First, the reputation of the government institution together with its managers is lost. Secondly, the public goodwill and the confidence of various entities who were partnering with the government are left in a compromised state (Byun & Roland-Luttecke, 2014). Enofe (2010) argues that individuals working in the government or outsiders can perpetrate financial scandals. Therefore, this calls for the establishment of a sound program for managing fraud to safeguard the state reputation and assets.
Early detection of financial fraud and prevention mechanisms must start with the individuals who are preparing the government’s reports. Owing to the current state of economy and the increase in the number of financial scandals, many corporations have launched a massive campaign like the Sarbanes –Oxley sweeping campaign in USA, which saw the company detect some underground financial activities that used to be practiced unnoticed. Additionally, there is a need to enact stringent legislation that will ensure that the government officials involved in financial scandals are either jailed or fined heavily. It will serve as a lesson to those who are thinking of misappropriating state resources in the future (Byun & Roland-Luttecke, 2014).
The main cause for the rise of financial fraud is the laxity in observing the laid down financial reporting procedures in addition to absence of truthfulness by individuals compiling government’s reports. Conflict of interest as well as lack of an independent oversight of management of government projects contributes to the occurrence of financial fraud in the government (Li, 2010). Besides the government’s internal audit system, there is need to outsource auditing services from an independent audit company as a countercheck measure. Stability and development of a country depend on the level at which both local and foreign investors are willing to put in the economy (Byun & Roland-Luttecke, 2014). Foreign investors will be discouraged from a country with many financial fraud scandals. The cost of doing business is high since a lot of the business money is lost through the acquisition of fake or paperwork. Corruption also makes it hard since the foreign companies have to part with huge finances in the form of kickbacks to state officials to get business licenses. The outcome will hurt the country as it will lose a significant amount of foreign money.
When foreign investors shy off from investing in a country, there is likelihood that the unemployment rate will be high since these foreign companies provide employment to citizens. The local currency will also be unstable due to low injection of the foreign currency. The level of development also tends to be low since the country’s GDP and development in the infrastructure will be low (Byun & Roland-Luttecke, 2014). Similarly, local investors are not spared with the increase in cases of financial fraud in the government. The development of any nation is pegged on the viability of the local investors.
Investors influence the flow and continuity of the local market systems when the foreign markets are extant. However, fraud makes them be uncertain about the future economic prospects, hence reluctance in investing. The local investors who engage the international markets through export trade also detect the GDP of the country (Ball, 2009). Fraud has also resulted to an economic downturn of many government parastatals thus making many of its employees to lose jobs during restructuring. Laying off the workers tends to increase dependency ratio; a fact that slows down a countries development index. In the event that the government institution, which has collapsed, was a manufacturing company, there will be scarcity in the supply of the product to the market thus increasing the price of the brand in the market.
Accounting scandal denotes a global occurrence that has affected numerous nations and economies. The scandal engages an array of illegal and criminal practices that are associated with falsification of facts or deliberate trickery. Fraudulent reporting can have unconstructive consequences that may harm not only the government but also a decline in the assurance of the public in the capital marketplace. It thus demands the establishment of a sound program for managing fraud to safeguard the state reputation and assets. The key basis of the increase in the cases of financial fraud is the negligence in observing the set financial reporting formulae. The government can aid the recovery of the economy in the event of fraud through the establishment of legislations that helps in the maintenance of sanity in the state financial operations and the business spheres. Legal frameworks also have to be in place to deal with individuals perpetrating accounting scandals.
Word count- 1234
Ball, R. (2009). Market and political/regulatory perspectives on the recent accounting scandals. Journal of Accounting Research, 47(2), 277-323.
Byun, S., & Roland-Luttecke, K. (2014). Meeting-or-Beating, Earnings Management, and Investor Sensitivity after the Scandals. Accounting Horizons, 28(4), 847-867.
Enofe, A. (2010). Reaping the fruits of evils: how scandals help reshape the accounting profession. International Journal of Business, Accounting and Finance, 4(2), 53-69.
Li, Y. (2010). The Case Analysis of the Scandal of Enron. International Journal of Business and Management, 5(10). Read More
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