Ethics And Scandals In Financial Reporting Accounting Essay

Ethics And Scandals In pecuniary Reporting Accounting EssayIntegrity is of ut or so grandness for a successful c beer in business and finance in the long run. Some believe that the world of finance lacks ethical considerations. Whereas the accuracy is that such issues ar prevalent in al angiotensin-converting enzyme areas of business.The business purlieu in much of the world is reeling from the revelation of several m angiotensin-converting enzymetary scandals in the past few years. The optimism of the turn of the century has been replaced by scepticism and dis assert. It give be discussed as to how we landed ourselves in this mail, what is being done to adjust it, and what the future holds for us. Though Enron has been used as the poster-child for this purpose, break conquers in report and integrated governance in Enron as well as in separate companies allow be discussed.Some companies that come encountered pecuniary inform problems will be discussed along with th e agency of auditors (including Andersens role in Enron), the regulative environment, few of the causes of the problems, and the current and possible future placecomes.Ethics and AccountingEthics (maintaining true and fair statements) is a key part of pecuniary account. For shareholders to trust a political party with money, they must(prenominal) feel confident in the companys pecuniary account. Financial reporting presents all data relating to the entityscurrent, historical and projected health meaning investors and shareholders desire upon the available financial data for making in organize and better decisions. To help entities comply with business regulations and maintain financial reporting, shareholders can trust the existing organizations designed to watchdog diametric aspects of the method of accounting world. Primary among the organizations are the Securities and Exchange Committee (SEC), Financial Accounting Standards Board (FASB) and Public social club A ccounting Oversight Board (PCAOB). These three bodies together ensure financial reporting is fair, reliable, and available to all investors.The specific importance of morality in business and in financial reporting is to inspire and ensure republical and investor confidence in companies. Without a strong code of moral philosophy, and adherence to that code, individuals may not be ac ascribe their investments are secure. Accounting master keys must hand over a strong ethical and moral reasoning as their decisions regarding financial reporting can set about major consequences for individuals as well as corporations and entire nations. Ethics in the business environment are much(prenominal) than just issues that relate to accounting because ethical practices can and will go after boundaries from business practice in to what a company may communicate its accounting professionals to do in financial record-keeping and recording. The piece of musicy recent scandals involving accounting fraud generally began at the CEO and make their way down into the financial records.Before the Sarbanes-Oxley Act, various financial abuses such as WorldCom, Enron, and Adelphia communication theory plagued the American public and affected economic health of the entire nation adversely. Most of these frauds stemmed from unethical accounting practices instituted at the highest levels of the corporations, but carried out in the financial reporting practices of public accounting firms. In declination 2001, Enron, which used to be one of the worlds leading energy companies once, filed the largest bankruptcy in the history of the U.S., using the retirement accounts of thousands of American spirters, to enrich those at the highest levels of the corporation. apply thousands of off-the-records partnerships to hide nearly $1 billion in debt and to inflate profits, company had defrauded shareholders of billions. Due to these scandals, President Bush and Congress were forced to take arduous stance in the form of the Sarbanes-Oxley Act in July of 2002.When ethics come out to be on the downfall in a society, the common man naturally turns to the government for guidance. Various crises in the history of the United States own led to creation of several regulatory bodies and laws. The three entities in the US, mentioned above, work nearly together to ensure financial accounting is honest. The SEC, the FASB, and the PCAOB are distributively an independent entity, but they often work in cooperation in certain areas such as oversight and reporting. While these three bodies work together, they rely on cooperation from member companies and from participation from babble-blowers in companies and public citizens. As the Enron relegate illustrated, there were systemic failures in the private-sector watchdog-groups. The SEC and the PCAOB must work closely together and include way to fast-track criminal cases.Enron and other financial reporting scandalsEnron was a great symbol of widespread problem in corporal America as its rise was as spectacular as its fall. Enron, formed in 1985 when Internorth purchased Houston Natural Gas was soon being run primarily by Houston Natural Gas administrators, with Ken Lay as CEO. In 1990, both Jeffrey Skilling and Andy Fastow were hired. In 1996, Skilling became the President and COO. A meteoric rise in both reputation and stock value came by, with Enron being named as one of Fortunes most admired companies in 2001 and its stock price peaking at $90.56 a share as on terrific 23, 2000. Much of the companys success was credited to the financial wizardry of Fastow. However, companys fall was just around the corner, with Skilling resigning in August of 2001. This was followed by a $1.2 billion write-off, and the beginning of an SEC investigation in October. By December, Enron had declared bankruptcy and the share price was $.26 per share.If Enron had been a unaccompanied case, concern would have dissipate d quickly and confidence in swell markets would not have plumped. But it was not so. Before Enron, there were companies such as Waste Management and Sunbeam not significant by themselves, but they should have acted as a warning of what was to come. After Enron the disclosures unbroken coming. WorldCom was caught capitalizing expenses. While Enron was trying to outsmart the accounting and capital market regulators, WorldCom made accounting errors that even novice accounting students would know were strange. A disturbing aspect of many of these scandals is the collusion among many executives.An important observation is that all of these scandals cant be attributed to one factor alone. Each one was different. hence it can be concluded that the solution is not easy to find. there is no single accounting practice that made these entities vulnerable to executive excesses.What these scandals had in common was a culture that was pervasive in corporations. A culture had come in that m ade it permissible to lie to shareholders and the markets. The ends disengage the means became the incorporate mantra. Also, the watchdogs, the auditors had turned a blind eye with their localise just on their consulting businesses. They were not as vigilant as they should have been in audits.The auditors role in ensuring fair playAuditors are suppositional to protect the public from the types of abuses that have been seen in the past. nonetheless though financial statements are responsibility of management, the shareholders hire auditors for the protection of their interests and to add credibility to financial information provided by the firms. To be credible, auditors need both expertise and impartiality. expertise assures if there is a financial reporting irregularity, the auditor has the capacity to find oneself it. Integrity assures that auditors will disclose any irregularity they may find. These cardinal qualities are essential. They are also multiplicative that is i f either is abstracted, other has no value. It has been found that both were missing in many cases. Expertise was missing as audits had come under hail cutting measures of firms. This happened often at the cost of character. Integrity was gone when auditors forgot that the first allegiance of a professional is to the public. Seldom did auditors betray management for the benefit of the public. Hence, even if they did discover reporting problems, rather than reporting them to the public they often helped management devise ship canal around the reporting problems.Auditors fell into this position (probably not because they were incompetent or unethical but) because of the cultures in major accounting firms. Andersen, Enrons auditor, is a classic example. in that location were good auditors who got caught up in an economic struggle leading to unreasonable focus on revenue generation. An audit firm having the highest reputation for competence and integrity compromised on its values as that was the only way its partners theme to be economically competitive.In the more recent Satyam case in India, the fraud started at the top level management and reached the financial records. The role of Pricewaterhouse, Satyams auditor, is also controversial in the said scandal.Causes of financial reporting problemsThe regulatory environment had not changed suddenly then why did the financial reporting problems surface at the time, is a question to be pondered upon. There are many reasons, not one that dominates.It was a confluence of circumstances that unresolved eyes to the problems. The bursting of the bubble economy was a major reason these financial abuses came to light. When everything was seemed bright, nobody questioned companies financial reports. In accounting the lack of relevance of historical cost accounting and even the basic traditional accounting poser were being discussed. The new economy was not to last forever. And when it did not last, investors began to admit tough questions. For many of the questions, there were no answers only denials and cover-ups.In the auditing profession, audits had nonplus loss leaders. The balance sheets and income statements had lost value, so auditing of the statements was not important. Thus, many audits became precipitous and more of a formality. No one was willing to pay for quality audits, so many audit firms believed there remained no sense in competing on the base of operations of quality. Cost drove audit decisions. Lower cost even with lower quality was the norm.The passivity of corporate boards was also a contributor. This was worsened by the growing number of complex financial transactions, most of which were beyond understanding of board members, who had gained their experience before such instruments came into being. Even a former accounting professor heading Enrons Audit Committee, a person of utmost integrity, had difficulty understanding the implications of the companys financial mano euvring.Finally, the biggest culprit is the corporate culture. Focus was laid on short-term gains forgetting about all long haul considerations. Also the executive scorecard became focused on salary. Many players had become greedy executives, investors, and attorney, among others but more than that was the need to compete on the basis of compensation.Implications for accounting educatorsThe perpetrators of most of financial reporting scandals are former students, graduates of accounting or MBA programs. So educators must ask themselves What are they doing wrong and what must they do to fix the problems?The first obvious reaction is to emphasize ethics in business and accounting curricula. This is important. Educators in a business ethics class can not dissuade someone who is inclined to move over a fraud from doing so. But it is also true that most perpetrators did not at the onset set out to commit a fraud. They obviously got ended up on a slippery zone.Also, the most bilk asp ect about most of the scandals is the number of people who, (though not personally involved) knew what was happening and still did nothing. Exceptions to the rule are some courageous whistle blowers, many of whom were products of university accounting programs. Thus, the focus of ethics classes should be to recognize and dismember the situations that can lead to compromise on ones ideals and values, and to promote the reporting of inappropriate behaviour. This can be best done in context because ethics issues come up in context, with you imagining yourself in the real situation. It is easy to go into an ethics class and give the answer that the instructor wants. It is an altogether different thing to put ones self in a case situation with conflicting pressures, and determine the appropriate action when ethics is only one of the many factors impacting your decision.ConclusionThe accounting profession is in the middle of a challenging time. A reputation gained over years and decades can be lost in a day. Accountants were thought of as persons of high integrity working at an uninteresting job. In the current scenario the job has gotten more interesting, but at the cost of their reputation for integrity. It is essential to win prickle the trust of the public and maintain their belief in the importance of accounting. The lane to restoring integrity of accountants today is a long one. The job will incomplete be quick nor easy, with the new series of financial reporting scandals that have come up.