Unethical Behavior Article Analysis
Unethical Behavior Article Analysis
Accounting is a practice used to show the financial position of an organization. Accounting information is used for various purposes. The government uses it to determine the amount of taxes to be paid. The information assists investors to assess the financial performance of an organization and make important investment decisions. Financial regulators, such as the stock market regulators, need accounting information to enable them value the shares of listed companies. A business organization can use the information to acquire loan credit from financial institutions. Accounting information is of great importance that makes some individuals and accounting managers engage in unethical accounting practices.
Unethical accounting practices involve manipulation of a firms financial information. There exists a variety of conditions that might lead to unethical practices in accounting. Individuals can provide false financial information so as to obtain personal gains. Firms can overstate the value of their corporate assets or underreport their liabilities in order to gain from financial institutions (Giroux, 2008). In some cases, organizations can understate their revenues in order to pay less tax. The value of shares in the stock market often depends on the amount of a firms revenue. Thus, a firm may overstate its revenues to gain from increased value of its shares in the market. Other situations that might lead to unethical practices include bribery, securities fraud, and manipulation of financial markets.
Unethical practices in accounting are not new in the United States of America. In 2001, one of the largest companies at the time, Enron, had an accounting scandal that took the world by storm. The scandal involved the companys senior executives and auditor Arthur Andersen. It involved masking of liabilities and misstating assets and profits. The firm used offshore accounts to hide liabilities and debts, and publicly released deceptive financial statements. The stakeholders of the firm, including investors, employees, and the public, were misled into believing that the firm was financially stable than the reality. The accounting fraud began with slight adjustments of the accounting information, but eventually led to the collapse of the company. Manipulation of the accounting information was motivated by personal gain and survival for employees involved. Unethical accounting practices were also witnessed in WorldCom organization. They were so fraudulent that the firm was led into the biggest bankruptcy in history (Rockness & Rockness, 2005).
The Enron and WorldCom accounting scandals forced the United States congress to introduce the Sarbanes-Oxley Act to eliminate sloppiness, overindulgences, and voracity from the business community. In 2002, the Act was introduced to ensure stringent financial regulation and reinforce the accounting practice guidelines for companies and public accounting firms. Under the Act, a public accounting firm cannot provide both consultancy and auditing services to the same client. In order to eliminate conflict of interest, clients are forced to use different firms for advisory, audit, and tax procedures. The Sarbanes-Oxley Act also contains the White-Collar Crime Penalty Enhancement Act, which provides strict penalties and guidelines for different types of accounting crimes. The White-Collar Crime Penalty Enhancement Act permits the government and regulatory institutions to take stringent action against executives and boards that commit different types of fraud (Fanto, 2007).
The Sarbanes-Oxley Act has faced a lot of criticism from firms and individuals. Companies claim that they are forced to dedicate more time, resources, and money to compliance issues. Foreign companies have become hesitant to list their securities, and domestic companies have opted to continue operating in the private market. They claim that the Act is extremely invasive, costly to implement, and ineffective.
If their claims against the Sarbanes-Oxley Act are justified, what are the effective ways to curb unethical accounting practices?
Fanto, J. (2007). Social defense of Sarbanes-Oxley. New York Law School Law Review, p. 517.
Giroux, G. (2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research: An International Quarterly, 75 (4), pp. 12051238.
Rockness, H. & Rockness, J. (2005). Legislated ethics: From Enron to Sarbanes-Oxley, the impact on corporate America. Journal of Business Ethics, 57 (1), pp. 3154.