Review of Accounting Ethics
ACC 557: Financial Accounting
May 22, 2013
Table of Contents
1.0 Corporate ethical breaches in recent times. 3
2.0 Accounting ethical breaches and their impacts 3
2.1 The Scandal of Enron 3
3.0 Organizational ethical issues and the management failure 5
4.0 Breach of the accounting practices and its impacts 5
5.0 Recommendations by the CFO 6
6.0 References 8
1.0 Corporate ethical breaches in recent times.
Ethics is an important aspect of business in today’s enironment. Sometimes management ignores or leaves to state laws to govern the code of ethics within a company. Companies have faced a lot of issues regarding ethical situations in modern ...view middle of the document...
Through off shoring of losses, and recording of the assets either inflated prices or the non-existing assets the company portrayed a healthy financial situation. The company did not have appropriate audits or checks and balances. Because of this, when it was discovered that the company had no liquid assets besides the fact that books showed huge figures, the management was left with few alternatives (Emerson, 2006).
In 2001, Enron started on its project of online selling under its brand name. However, the control over its assets couldn’t be established by the management. Thus it had to file bankruptcy by December, 2001 (Emerson, 2006). Firms in the past, such as Enron created a special purpose entity (SPE) as highlighted by Levitin and Bratton (2012) in order to accumulate losses. The purpose of this wa to transfer the profits to the mother company or the firm in which the top management thinks it would be appropriate to and transfer the losses to these SPEs. Same was the case of Enron with losses accumulating in an offshore company they maintained a healthy financial statement.
Furthermore, as the company’s reward system was designed in such a way that whether the company incurred losses or profits it had no impact on the reimbursements of the top management. They received annual pay raises and bonuses as before even after the company started incurring losses. This resulted in them taking exaggerated risks thus exposing the firm to heavy losses. Management was not concerned with the outcome of their decisions as they were receiving more than appropriate financial and other benefits. They did not think about the other stakeholders. Decisions were made at the top without dissemination of the negative impacts they might have on the shareholders.
The reason management failed to see the impact of their decisions was the flawed reward system and lack of internal checks and balances. The authority figures made the decisions without realizing the impact of their decisions on the staff or the shareholders.
In order to counter for SPEs formed there have been policy formations with regards to tracking equity ownership. These have lessened the impact of such accounting defences that the companies formulate but further policy formation and legal boundaries need to be formed and implemented to resist such behavior in the future.
3.0 Organizational ethical issues and the Management Failure
Management of the company must have processes in place to deal with ethical concerns; otherwise it will affect the trust of the consumer on the company (Conroy, 2006). The reason for the collapse of Enron was the failure of its lower management to address the issues which they were aware of. Furthermore, Andersen’s which was one of the Big Five accounting firm failed to stand up to the management of Enron with regards to its accounting practices (Cullinan, 2004). For the best public interest an auditor should be aware of the misrepresentation, recognizing a...