Ethical Issues in Accounting - Case Study Example

Ethical Issues in Accounting Name Institution Tutor Date Introduction The periodic occurrence of corporate scandals is an issue of great concern. Massive scandals in the previous years such as the Enron scandal and the Bernard Madoff Ponzi scheme greatly surprised many. Nevertheless, the business world has recently witnessed even more sophisticated and huge scandals such as the Volkswagen and Toshiba scandals. This report provides an evaluation of the two recent scandals. The scope of the analysis will also be grounded on finding workable solutions that can transform the ethical conduct of organizations. The facts relating to the Volkswagen corporate scandal A critical fact that underlies the Volkswagen scandal is cheating/ rigging in emission tests. Hotten , (2015) discloses that Volkswagen has had a motivation to sell its brand in the United States supported by its massive marketing campaign of promoting its car’s as low emissions products. Stunningly enough, the Environmental Protection Agency (EPA) discovered that most of the cars sold in the US were actually designed with a software or a defeat device that was to alter performance in order to improve results. The software facilitated cheating in emissions tests, making the cars to be displayed as cleaner than they ever were. Although the company was able to conceal the real emission levels, when the emission controls were turned off, the cars would release nitrogen oxide (NOx), a critical pollutant to the level of 40% more than the lawful limit. The facts relating to the Toshiba corporate scandal Doctoring accounting books for many fiscal years is one of the key facts in the Toshiba scandal. The Exchange Surveillance Commission discovered that Toshiba made alterations in profits amounting to 152 billion yen which is $1.2 billion. For a period of seven years, the company’s performance was not good, yet the top management did not accept this fact, as a result doctoring the books of account was perceived as a viable option (Nagata, 2015). Preparation of financial statements that are not in line with the IFRS requirements is another fact that existed in the Toshiba scandal. The requirements of IFRS involve the use of precise measurements, recognition, disclosure and presentation of financial information (IFRS, 2010). Toshiba did not comply with the set IFRS standards for many years Stakeholders involved in the scandals The stakeholders in the Volkswagen scandal include; the CEO Dr. Martin Winterport who was actively involved in implementing the fake software’s. Winterport resigned and is bound for prosecution. The board of director also had a part to play in the scandal, most of them resigned. The company engineers also greatly contributed to the scandal by fitting in the software’s yet their actions would affect human health. The engineers also resigned (Hotten, 2015). In the Toshiba scandal, the stakeholders involved included Hisao Tanaka the CEO, who was forced to step down and resign in September. Norio Sasaki who was previously the Vice chairman of the company was also forced to leave his job due to the scandal. Several board members were also involved in the scandal. They were replaced during the roll round in September. Employees of the accounting department in the company were also liable for the occurrence of the scandal. In addition, the audit firm involved in the auditing activities of the firm also greatly influenced the occurrence of the scandal (Nagata, 2015). The ethical, legal, accounting and/or corporate governance issues involved in the scandal The Volkswagen Emission Scandal Ethical issue An ethical issue arising from the Volkswagen Scandal is the lack integrity. It can be stated that is integrity is one of the critical ethical subjects that organizations should uphold (Logsdon and Wood, 2005). Volkswagen was however not honest about its dealings essentially when it comes to disclosing the emission levels of its cars. For instance making advertisement that state that the cars it produces have low emission rates indicates the lack integrity by the management of the company. The lack of integrity implies that Volkswagen did not uphold integrity standards such as the IMA (Institute of Management Accounting) Rule 102 which proposes that companies should conduct their operations with integrity. Lack of objectivity is another ethical issue that arises in the scandal. Objectivity demands the application of fairness in the actions performed by an individual or an organization. Volkswagen did not act fairly essentially in terms of taking care of human health. Nitrogen oxide (NOx) can adversely affects human health, yet the company went ahead to falsify emission tests while not putting into consideration the plight of human health (Hotten, 2015). Such an action definitely lacked objectivity. Legal Issue A legal issue that arises from the Volkswagen case is breach of contract which is actually liable for prosecution. The misrepresentations made by the company concerning the low emission capability of the cars it manufactured breached several contracts. It can be stated Volkswagen breached the contract with the shareholders after a decline in share prices resulting from the eruption of the scandal. Additionally, Volkswagen breached the contract made with car dealers by cheating on the emission tests, the dealers lost business deals. Also it can be stated that the company infringed the Clean Air Act. The EAP announced that by installing the software on the diesel cars unlawfully from the year 2009 to 2015, the company violated the act by permitting the cars to cheat on the outcomes of the tests (Coleman, 2015). Accounting or corporate governance issues Lack of transparency in environmental disclosure is a corporate governance issue in the Volkswagen scandal. The management of the company, essentially the CEO Dr. Martin Winterport and the board of director were very much aware of the deceit that was taking place in terms of the use of software that was altering the results of the emission tests. Schiermeier ( 2015) reports that the company’s management later on self-confessed that approximately half of the cars that were driven in the United States and a lot more across the world many be releasing a considerable amount of nitrogen dioxide and nitric acid, however the management did not allow precise environmental disclosure. Conflict of interest is an accounting and corporate issue that arises in this particular scandal. Conflict of interest usually arises when individuals gain incorrect personal benefits from actions that are in line with their official capacity (Larsen, 2003). Foremost, the body that was in charge of evaluating activities of the car industry; The Vehicle Certification Agency was accused of having conflict of interest in the entire ordeal. The Agency usually receives 69.91% of its profits from car manufacturing companies who make payments in order to get certification for meeting safety and emission standards. However, The Vehicle Certification Agency was not able to test the emission from Volkswagen, yet the EAP was able to (The Guardian, 2015). Additionally, the Volkswagen management displayed conflict of interest by promoting the sale of cars with high emission capacity yet this is an environmental issue that had great effect on human life. Toshiba Ethical issues An ethical issue arising in the Toshiba scandal is the use of fraud essentially in the preparation of accounting statements. The top management of Toshiba put pressure on the subordinates to display that the company was making profit however this was not happening. For instance in 2012 September, the digital service and product division informed the Sasaki who was then president that the company was actually not making any profits and that the operating loss amounted ¥24.8 billion for the first half of the financial year. Sasaki however declined to accept the estimate and asked the accounting department to escalate its profits by ¥12 billion within three days (Nagata, 2015). In most cases, as Larsen, (2003) argues although financial statements are prepared by accountants and auditors, nevertheless it is the responsibility of the management. The responsibility of the auditors is to present the financial statements while the management is responsible for adopting ethical and sound management practices, in this context, it can be stated that the top management in Toshiba were unethical. Lack of rightful communication to users of accounting information is another ethical issues arising from this scandal. According to the ethical standards of management accounting as proposed by IMA (Institute of Management Accounting) Rule 202, there is need for company to communicate full information to the users of their accounting reports. It can be stated that the Toshiba management defiled this particular requirements by not disclosing to the shareholders that they were actually exercising loss. Legal Issues The Toshiba scandal was executed by conducting illegal accounting practices. The Securities and Exchange Surveillance Commission had suspicions concerning illegal accounting practices taking place at Toshiba. The ESC initiated investigations through the Financial Service Agency. A committee of four members evaluated the accounting practices undertaken by the company from the financial year 2009 to 2014. The committee discovered a sequence of inappropriate entries in the accounting books that displayed an astounding net profit of ¥152 billion ($1.2 billion). The report further disclosed that the urgency of the top management was to secure profits for every quarter, as a result they set targets and made demands on the subordinates to make improvement so the profits of the company. In real senses no profits were actually made (Nagata, 2015). Accounting Issues / Corporate Governance Issues Manipulation of accounting books is an accounting issues that emerged in the Toshiba scandal. Nagata, (2015) highlights that the manipulation of accounting books was conducted in a variety of ways. At one point the company out-sourced computer manufacturing to a partner. Toshiba would then sell the segments of the computer to the partner. The partner would then bring together the computer segments and then Toshiba would buy them back. The computer division would constantly vend additional parts than needed to the partners which in turn raised the inventory of the company, which gave Toshiba the opportunity to inflate its turnover. Also, the report indicated that the infrastructure division deliberately understood the price of construction projects nevertheless the exact costs were raised (Nagata, 2015). Fictitious accounting disclosure/ or lack of transparency in disclosure is another critical fact in the Toshiba scandal. Toshiba acknowledged that for the previous seven years, it exaggerated its profits by close to $2 billion. The management of the company made an announcement that it has been facing serious accounting challenges for a long time but they did not understand. In order to respond to the scandal, the company immediately changed its top management (Addady, 2015). Comparison between Enron and the Volkswagen Scandal When making a comparison between the Enron and the Volkswagen scandal. Various arguments can be arrived at. Foremost, one of the existing similarities between the two scandals is that is both cases, there was deliberate fraud and criminal intent. In the context of Enron the executives of the company and the Author Anderson audit firm collaborated to intentionally manipulate books of account to indicate overstated earnings yet the company was operating on debt (The Economist, 2002). In the Volkswagen scandal the management of the company and software engineer liaised in the installation of software that would cheat when emission tests were conducted. It can be stated that in both cases there was deliberate fraud and criminal intent. Another similarity that exists between the two scandals is that in both, the management of the companies made false advertisements in order to gain more profits. Volkswagen was actively involved in adverting essentially in the United States in order to promote its car brand that had low emissions levels. This was basically motivated by the need to increase its profits. Enron also made false advertisements to its employees and shareholders persuading them the buy stocks yet the company was in massive debt. An existing differences between the two scandals is that Volkswagen Scandal was actually discovered when the company is making massive profits out of its fraudulent activities. The Environmental Protection Agency discovered the deceit taking place at Volkswagen while the company is still making massive profits both in the United States and Europe. In the case of Enron discovery of the scandal occurred when the firm had already filed for bankruptcy and was in tremendous debt. Comparison between Enron and the Toshiba Scandal Enron and the Toshiba scandal are similar in the sense that both involved lack to transparency in the disclosure of accounting information. In the case of Enron, the auditor Author Anderson manipulated books of accounts by presenting overstated profits despite the numerous debts that the company was experiencing. Author Anderson later destroyed the documents in order for the Securities and Exchange Commission (SEC) to miss out on adequate evidence of wrongful disclosure. In the Toshiba scandal the top management forced the employees in the accounting department to present financial information showing that the company was making a lot of profits yet in real sense huge losses were derived from its operations for many Fiscal years. Also, in both the Enron and the Toshiba Scandal, tampering with sales is a common aspect in both scandals. In 2001 Enron greatly tampered with its sales in order to show shareholders that it was performing well. Toshiba’s main approach of showing that it was making profits was through the tempering of sales The existing difference between the two scandals is that in the context of Enron the audit firm Author Anderson was actively involved in the entire ordeal of falsifying the account information’s of the company. In the context of the Toshiba scandal the executives forced employees of the accounting department to falsifying the account information. Improvements and changes The deontology theory propagates that human beings should endeavour to perform good acts devoid of there being weight or measurements on the evil of good they do (Staverena, 2007). One of the key roles the management of organizations is to maximize the interests of the shareholder no matter what measurements is placed in this particular task. What is evident in the recent scandals is that the executives in organizations do not perform this task. In most cases they perform evil as opposed to good. It can be stated that some executives place a lot of measure to the work they do as a result they expect higher income. If they do not receive the pay they desire, then they get involved in fraudulent deals which results to huge corporate scandals. In order to avoid such scandals in future, increasing the pay of the executives is one of the viable ways in which they can be influenced to do good, however the good will be as a result of putting higher measures. Staverena, (2007) proposes that there is need to go beyond the utilitarianism and deontology the theory. Staverena, (2007) recommends that although the deontology theory provided a better ethical ground than the utilitarianism theory, nevertheless, there is need to beyond the theories by implementing more stringent ethical rules. In order for improvements and changes to take place, there is need to implement new codes for corporate governance. For instance in a reaction to the Toshiba scandal. The Japanese Prime Minister Shinzo Abe came up with a new code of conduct for corporate governance that necessitates the use of external directors in boards and a motivation on the value of the shareholder (Smith, 2015). There is however need to do more essentially when it comes to the enforcement of the ethical codes. Doing more would definitely imply stronger enforcement of the codes for example instead of just having two external directors, companies should increase the number to five. Another solid way to prevent future scandals is to ascertain that the people employed as executives and members of the board in organizations are comprehensively vetted essentially in terms of their ethical behaviour. It can be stated that as proposed by the deontological view of ethics it is the breaching the codes of ethics that makes people to be unethical as opposed to the consequentialism perspective that it is an inherent virtue in them that makes them act unethically (Lenssen, 2014). It is therefore essential to know that people do not act unethically because they were born to be unethical but it is a behaviour that is developed. Consequently, in order to avoid future corporate scandals, there should be progressive scanning of the ethical behaviour of executives and board members. Conclusion The above report has presented an analysis of recent corporate scandals, the Volkswagen and the Toshiba scandal. What is evident is that it is essential for change to be implemented in order to prevent such occurrences. This paper proposes the need for implementation of stringent ethical codes in corporate governance. In addition, people employed as executives and members of the board in organizations should be comprehensively vetted and also increasing the compensation of executives. References Addady, M, 2015, .Toshiba’s accounting scandal is much worse than we thought, The fortune. Coleman, C, 2015, VW could face long legal nightmare, BBC News. Hotten, R, 2015, Volkswagen: The scandal explained, BBC News. Lenssen, P, 2014, The Ethics and Legality of Financial Regulation: What Enron Revealed, Auburn University. Larsen,J, 2003, Modern Advanced Accounting, McGraw Hill . Logsdon, J and Wood, D, 2005, Global business citizenship and voluntary codes of ethical conduct, Journal of Business Ethics, 10(1),p 102. Nagata, K , 2015, Pressure to show a profit led to Toshiba’s accounting scandal, The Japan Times. Schiermeier, Q, 2015, The science behind the Volkswagen emissions scandal. Nature Review. Staverena, I, 2007, Beyond Utilitarianism and Deontology: Ethics in Economics, Review of Political Economy, 19(1). Smith , N, 2015, Japan's Enron Reckoning, Bloomberg view. The Economist, 2002, Enron The real scandal, The Economist The Guardian, 2015, Car emissions test body receives 70% of cash from motor industry, The Guardian. Read More