Ethics in Accounting and Corporate Accounting Scandals - Research Paper Example

Ethics in Accounting and Corporate Accounting Scandals The research study is aimed at establishing a relation between the unethical practices in accounting and the occurrence of corporate scandals. The concept of ethical accounting practice has been explained. The example of corporate accounting scandals that occurred over the years have been analyzed to find the impacts of unethical accounting practices in such cases. This helped to explain the importance of ethical accounting practices in the companies. The accountability of the accountants and auditors in providing true financial disclosures for protection of the investors has been emphasized in this research. The suggested course of action by the companies is also recommended in order to prevent unethical practices that lead to corporate scandals and eventual bankruptcy of the organizations. Introduction The accounting practices are based on the Generally Accepted Accounting Principles. Apart from the rule base practices, the importance of principle based practices have emerged in the field of accounting. This is due to the corporate scandals that have occurred over the years. These corporate scandals establish a link with the unethical practices in accounting. In different countries, the accounting practices are guided by different laws like the tax law in Germany, accounting law in Sweden, company law in USA, etc. The unethical practices in accounting have not only resulted into bankruptcy of the companies but also eroded the wealth of the investors. International Financial Reporting Standards, Sarbanes-Oxley Act have been implemented in order to prevent the unethical accounting practices and subsequent corporate scandals. Research Problem The research problem for this research study is “How is corporate accounting scandal related to the ethical practices of accounting?” The research problem is also aimed at understanding the impacts of unethical practices in accounting on the organization and its stakeholders. Literature review The field of accounting in business and the profession of accountancy is a means of serving the public that distinguishes itself from being just a function of earning of livelihood. The professionals engaged in the role of accounting are responsible for their activities and are accountable for the information disclosed to the public. The accountability is much greater as compared to the compensation received for their role in accounting domain. The most important part of accounting is the code of ethics that is to be followed as a professional in this field. This leads to the concept of ethics in accounting (Duska, Duska and Ragatz, 2011). Accounting ethics is a part of applied ethics which relates to the moral values and judgments that are applied in the role of accounting. The concept of accounting ethics was first introduced by Luca Pacioli, an Italian mathematician which was later endorsed by the government departments and even the private organizations. The training modules conducted by the companies while training the accountants and auditors include accounting ethics as an integral part. The wide range of accounting services and the news on the fall of big corporate houses like Enron have triggered an importance of following code of ethics in accounting field. Due to fraudulent accounting practices, mal-intention on the part of accountants, auditors and the management, the profession of accountants and the subjects of accounting have been badly criticized. Also the losses incurred by the companies due to unethical practices in accounting field have blown out of proportions (McPhail and Walters, 2009). In order to avoid the similar devaluation of companies and bankruptcy in future, the institutions irrespective of government and private entities have stressed on the importance of accounting ethics and proper implementation of ethical practices by their accounting departments. The lack of ethical accounting leads to fraudulent accounting practices in the companies which may be due to manipulated or inflated financial analysis, creative and purposeful accounting and reporting or as a result of bribery. Since the last three decades, there have been several instances of fraudulent accounting practices that have invited penalties for the organization, additional expenditures for request of protection to the regulatory authorities and eventual closure or shut down of companies. The fall of multinational companies like Enron, World Com, and AIG are the brightest examples of the impact of unethical accounting on the organization. The work culture and the core values of an organization are extremely crucial in determining the role played by the accountants, auditors and the management body. Ethics in accounting introduces the principle-based judgments at par with the rule based actions in the profession of accounting (Blake and Gowthorpe, 1998). The International Accounting Standards Board have developed the International Financial Reporting Standards which are principal based and are used widely across 115 countries over the world. Research Methodology The research methodology adopted in this study is aimed at establishing a relationship between the accounting scandals occurring in the companies as a result of lack of ethics in the accounting field. In order to conduct the research, a systematic approach have been adopted which includes a study of the relevant literature on accounting ethics. In the literature review, the importance of ethics in the field of accounting has been assessed. The causes and impacts of unethical accounting on the organizations over the years with the examples of corporate collapses in the past have been studied. In order to establish the linkage between unethical practices and fall of corporate houses as an effect have been analyzed with the help of data and information obtained from secondary data sources line electronic sources, books and news on the related accounting scandals. Thus the data that have been collected for the purpose of research analysis is secondary data. Hence, the methodology adopted for research on the relation between ethical accounting and corporate accounting scandals is secondary method of research. The analysis has been conducted in this research by taking an example of corporate scandal like Enron. Based on the informational data collected for the research, the major causes pertaining to the fraudulent accounting practices adopted by the company have been determined. The analysis of the secondary data provides an insight of how the unethical practices in accounting leading to corporate accounting scandals have impacted the public. The effects of accounting scandals on the organizations and its stakeholders have been analyzed in this research study. The research methodology attempts to recommended necessary actions for preventing accounting scandals in future. The limitations of the research analysis and findings have also been indicated in this study. Analysis and findings The adoption of unethical practices leads to corporate scandals. The relationship between lack of ethics in accounting and corporate scandals have been analyzed by taking Enron, as an example. Enron was an American multinational company and was one of the world’s top performing electricity and natural gas provider. Enron’s operation also includes paper and pulp, communications, etc. Enron, who claimed revenue earnings of over $101 billion, was voted as the most innovative company of America. All these information published by Enron was a result of a pre planned accounting fraud aimed at inflating the financial statements and misguiding the investor to sustain liquidity levels of the company. Enron manipulated their statement of accounts by creating a number of offshore entities. These entities were used in order to show case transactions of the company. This allowed the management to transfer funds to these offshore entities in order to hide the actual losses of Enron. Thus the entities appeared to be profitable whereas the reality was that the company was actually loosing money. The executive of Enron took advantage of this insider information and started to sell shares at high values of stock price whereas the general public was told to invest in the stocks of Enron deceiving them of a promising performance (Barnes, 2012). The brand image and the inflated financial statements created such information flow in the market that investor decided to invest in the company while the company was actually debt-ridden. When the executives of the company stared to sell the shares in bulk, the prices of Enron shares took a dip. Subsequently, it was reported that the shares of Enron were over valued (Harder, 2010). This was also supported by the fact that the income statement and balance sheet of the company was not published simultaneously. All these market events led to the anticipation among the investors that the information on Enron’s profitability is not true and as a result the share price and valuation of Enron eroded in quick time. Ultimately Enron had to file bankruptcy and the company was subsequently liquidated in 2001. Such corporate scandals like Enron, etc. are the outcome of unethical practices in accounting. The preparation of inflated statements by the accountants is an immoral activity that does not safeguard the interest of the investors. The investors and the general public rely on the information published in the financial statements for taking investment decisions (Warren, Reeve and Duchac, 2008). Thus fraudulent activities on the part of the accountants result into losses of the investors. The auditors of Enron, Arthur Andersen also signed on the financial statement without carrying out the due responsibilities. With the fall of Enron, their auditor also eroded as they were highly accountable for the committed accounting fraud. The fall of Enron led to the erosion of wealth of its investors and also the resulted into devaluated of the company leading to subsequent bankruptcy. Hence, it could be understood from the above analysis that unethical practice in he field of accounting leads to corporate scandals that leads to loss of image of the company and devaluation of its assets. Recommendation In order to ensure long term sustainable operation of the company, the organization must ensure to protect the interest of its investors. The protection of the investors is recommended through ethical accounting practices and true financial disclosures of the company. The companies must adhere to the regulations enacted in order to prevent future corporate scandals that not only damages the interest of the company and its investors but also abuses the accounting profession. The companies should adhere to the International Financial Reporting Standards in addition to the Generally Accepted accounting Principles. The companies should also comply with the Sarbanes-Oxley Act that is specifically designed to prevent corporate scandals as a result of unethical practices in accounting. In order to achieve successful implementation of ethical practices in accounting, the companies must look to strengthen their corporate governance policies. The directors and the senior management of the company should undertake corporate governance as important tool to implement the code of conduct of the organization and ensure a system of true and fair practices. Limitations The limitation of the research study is that the implementation of ethical practices of accounting is greatly dependent on the moral and ethics of the individual engaged in the work of accounting and auditing. The core values of the organization also go a long way in ensuring that appropriate judgments and decisions are taken by the executives in a situation of dilemma. The research study is able to highlight cases like Enron that have resulted into bankruptcy as a result of unethical accounting practices. However, it does not imply that organization that have not gone bankrupt do not contain instances of unethical accounting practices (Hoffman, 1996). The due diligence and compliance with conscience by the accountant and auditors in the field are vital to avoid corporate accounting scandals. Conclusion There is an inherent relationship between the corporate accounting scandals and the ethics in accounting. The ethics in accounting practices are in accordance with the principal-based rule. The profession of accounting is accountable to the public for true financial disclosures due to which the principal based rule is important. Ethics in accounting enables the accountant and auditors to prepare and validate financial statements in a fair manner by taking appropriate decision in situations of dilemma. Based on the information provided by in the financial statements, the general public takes decisions on investment. Thus fraudulent accounting practices, though may lure investors in the short run, would finally lead to devaluation of the company and erosion of wealth resulting into bankruptcy. In order to safeguard the interest of the investors, the major stock exchanges and the companies have emphasized the need of a strong corporate governance and compliance with the requirements of International Financial Reporting Standards, Sarbanes-Oxley Act, etc. References Duska, R., Duska, B. S. and Ragatz, J. A. (2011). Accounting Ethics. UK: John Wiley & Sons. McPhail, K. and Walters, D. (2009). Accounting and Business Ethics: An Introduction. USA: Routledge. Blake, J. and Gowthorpe, C. (1998). Ethical Issues in Accounting. USA: Routledge. Hoffman, W. M. (1996). The Ethics of Accounting and Finance: Trust, Responsibility, and Control. USA: Greenwood Publishing Group. Warren, C. S., Reeve, J. M. and Duchac, J. E. (2008). Accounting. USA: Cengage Learning. Harder, S. (2010). The Efficient Market Hypothesis and Its Application to Stock Markets. Germany: GRIN Verlag. Barnes, P. (2012). Stock Market Efficiency Insider Dealing and Market Abuse (Ebk - Epub). England: Gower Publishing, Ltd. Read More