Ethics Of Financial Accounting
WorldCom and Enron scandals should have taught us a lesson or two on investment. Once a company has filled for bankruptcy act, should not be allowed to go worth normal business activities. WorldCom was left to still fair on , and it bought some time forge a scam. The government should have foreseen this problems earlier. How did they manage to publish their financial accounting books without thorough auditing? Thats why The Sarbanes-Oxley Act of 2002 was incorporated in the accounting laws to help curb accounting irregularities.
Accounting Ethics in a business entails activities that may be characterized by rules and objectives for the general day to day running of business for the achievement of business goals. The rules are for guidelines while the objective help achieve some goals drawn earlier on by the business. (Murphy,2003, Online)
Accounting professionals are expected to be highly competent, objective and reliable for more,they must be highly qualified. This ethics require maintenance of self-discipline with the professionals that will lead confidence building especially with investors and the general public. (Murphy,2003, Online)
Ethics is defined as the code of conduct in running of the business in relation to its professionalism and delivery to the clients. Different professions organizations agree to uphold different ethical professional principles and rules basing on their profession to conduct its members, for example the Professional Conduct of the American institute CPAs, (AICPA), The national professional association for CPAs. (Murphy,2003, Online)
The institute of Management Accounting (IMA) this applies to practitioners of management and financial management the Institute of Internal Auditors (IIA) this kind of ethics applies to its members as well as to Certified Internal Auditors (CIAs). Independence in code of ethics requires avoiding conflicting of interest which calls for maintaining integrity and objectivity. One should not be biased in their opinion,impartial or objective. (Murphy,2003, Online)
CPA may be restricted in exercising independence in performing their duties in relation to the AICPA`s rules, thus limiting them in auditing a company that either has interest in,financially invested in that company or have any kind of relationship with the directors. Ethics enforcement being the second code of conduct, is self-regulated through internal professional associations means such as the AICPA,the IMA and IIA rather that the government regulations. This internal means have mechanism to enforce the codes of ethics and penalties availed upon violation of each one of this ethical standards. (Murphy,2003, Online)
The disciplinary measures included: expulsion ,which is very extreme and can ruin accountant’s reputation professionally. CPAs are subject to federal security laws and regulations based on their public practice to audit financial statements of public corporations including Securities exchange Act of 1934 which regulate corporations that sell their stocks to the general public. (Murphy,2003, Online)
The Securities and Stock Exchange Commission (SEC) has requirement that its a must for these corporations` financial statements be audited by independent CPA, this body establishes and enforces auditing standards and procures that constitutes CPA independency within its authority of the SEC body.(Murphy,2003, Online)
The third ethical code is responsibility, provides services to the public such as auditing,accounting and many others, is said to be public practice. This means that the professions are answerable to clients in terms of quality, trust, reliability ,the government in case it operates on constant losses which maybe questioned upon,the creditors who have interest in their financial books to check whether they are credit worth,investors to find out the value of their assets and profitability of the business,employers and financial community at large. (Murphy,2003, Online)
AICPA applies in all fields of their profession conduct regardless of where they are in the world because the public relies on them to maintain the orderly functioning of commerce. The tasks they are delegated upon, are expected to undertake with professional competence, and carry out their duties with sufficient care and diligence .AICPA,IMA and IIA code of ethics requires that accounting confidential information should not be disclosed to a third party.(Murphy,2003, Online)
The Enron scandal
Enron is a U.S. energy-trading and utilities company. Its shares traded as high as $85 and had huge earnings that no one would suspect its fraud, this shocked investors and analyst. It did not show company accounts suspected of hiding its debts and losses and its dealings were very shady which falsely inflated the company’s revenue. (BBC NEWS, 2002 b, Online)
The Enron scandal deception unfolded and creditors and investors withdrew therefore forcing it to go into bankruptcy in December .2, 2001,which was the largest ever in American company history. (Arthur Andersen & Co., 1987,p 4.) When Securities and Exchange Commission (SEC) began investigation the fraud allegation and its irregularities,Enron tried out to sell another energy company in Houston but it did not succeed as its losses had become clear and it quickly filed for chapter 11 bankruptcy for protection. (BBC NEWS, 2002 b, Online)
The company was seen to be very successful as it emerged from nowhere to being the America’s seventh largest corporation in only 15 years in operation,employing 21,000 staff and operating in more that 40 countries. The company chairman Mr. Lay,were close allies with the US president Mr. Bush who donated nearly $2 million to finance his campaigns but when the scandal started coming to light, bush administration kept its distance. (BBC NEWS, 2002 b, Online)
The then President of Enron,Jeffrey Skilling shed some light when he said the company was loosing $29 billion on broadband network alone and the analyst were still deceptive on that matter. Analyst from this firms ,were seen having different conflicting loyalties. (BBC NEWS, 2002 b, Online)
The analyst were worrying about whether an investor will find this report useful or the chief executives will find this report offensive. many people could not understand the Enron`s new line of business , but were still holding on to the good stories been told by this company. Everything in question was hidden by erroneous accountings. (BBC NEWS, 2002 b, Online)
Enron was considering separate public offer for internet operation in early 2000, questions were raised by analyst and were assured that their firm wouldn’t be chosen for underwriting ,its plans for I.P.O never happened and the broadband business, a unit that traded capacity in telecommunication bandwidth,did not come through. (BBC NEWS, 2002 b, Online)
If wall street had asked questions about its shady business dealings, the skyrocket increase of 50 percent shares in first half of that year after the then president Jeffrey Skilling pointed out the losses, I would have saved investors from Enron`s pulling out of market value. (BBC NEWS, 2002 b, Online)
The former executive Ken Lay in the year 2006 and Jeff Skilling were found guilty of the charges that led to Enron bankruptcy. They were both convicted but suddenly Lay died, so charges against him were withdrawn Skilling was sentenced to more than 24 years in prison. The employees lost their retirement savings but executives sold off their shares making millions. (BBC NEWS, 2002 b, Online)
The key people involved in this scandal were the accountant Arthur Andersen, who destroyed incriminating documents pertaining the firms accounting books and Andrew Fastow, former chief financial officer. David Duncan was Enron`s chief auditor, his work was said to check the company’s accounts and was said to have shredded key documents which were crucial to the case. (BBC NEWS, 2002 b, Online)
The WorldCom scandal
WorldCom is America’s second-biggest long-distance phone company. Its founder and chief executive,Bernard Ebbers in1983.It grew by acquiring more than 70 companies over the years. In April 2004,it changed its name to MCI and acquired it in 1998. (BBC NEWS,2002 a,Online)
WorldCom raised up from bankruptcy with a better balance sheet that shocked its competitors. It provided business such as,data transmission services,commercial voice services,internet-related services, international communication services and long distance services. (BBC NEWS,2002 a,Online)
Scott D. Sullivan,a co-conspirator in this fraud was WorldCom`s Chief Financial Officer,Treasurer and Secretary. Ebbers and Sullivan provided information to the members of investing public on behalf of WorldCom concerning its financial results and operating performance and that in formation were relied upon. (Findlaw, 2002, p.4)
The public would make decision basing on their reports issues in matters of purchasing, holding or selling WorldCom securities because they based this as guidance. Company over the years failed to meet such estimates, company stocks declined and their prices subsequently fell that lead to its bankruptcy. The employees of WorldCom in 2001,provided a testimony which the shareholders had filed a law suit against the company, detailing the problems that would bring it to a downfall but the charges were withdrawn. (Findlaw, 2002, p.4)
Later on,Securities and Exchange Commission (SEC) lawyers in June 2002 filled civil charges against this company for an estimate of $9billion worth accounting errors. Financial executives misinterpreted their account and also delayed reporting their expenses on their financial year for a period of 2 years, from 2000 to 2001, this gave investors wrong indication that the business was growing. (Findlaw, 2002, p.7)(Arthur Andersen & Co., 1987,p 4.)
The business executives of this company engaged in an illegal scheme of fooling the investing public, shareholders security analyst and SEC. is continuing to pursue the legal case while several company executives are filed with criminal charges by Justice department. So far they have uncovered $9 million which is a partial settlement, the rest is undisclosed but the government is continuing investigation on the company’s operations. (Findlaw, 2002, p.10)
President Bush wanted tough legislation to punish the offenders and not be let to hold high-level business positions. again, so that America business may regain faith by investors. SEC being US financial watch dog,charges WorldCom with fraud and thereafter requested to answer questions asked upon the o accounting fraud by government set committee. (BBC NEWS,2002 a,Online)
The government is responsible for its citizens welfare due to the job cuts which led to employees loosing their jobs, more that 60 banks have been suspected to have given loans to WorldCom, this will result to ripping losses hence economy downfall .Bernard Ebbers and Scott D.Sullivan, reviewed documents that were eye opener on the events that would affect to WorldCom`s revenues. (BBC NEWS,2002 a,Online)
Sullivan went on cautioning that WorldCom`s operating performance and financial results were deteriorating and its upcoming reports period would not meet analyst’s expectation. Ebbers refused to issue an earnings warning report which was advised by Sullivan but instead the two agreed to conceal company’s true financial position from the public and instructed subordinates to fraud the books and forge entries in general ledgers. (Findlaw, 2002, p.6)
This forged entries were designed to increase the revenues and decrease expenses resulting to artificial-inflated figures and revenues growth rates that would satisfy analysts` expectations. These adjustments included improper capitalization of line cost expense.(Findlaw, 2002, p.6)
The two in conspiring with the employees,omitted to disclose material facts that made financial results incomplete,inaccurate and misleading and later on filed a financial statement with SEC. In this long series form 2000 to 2002,in every quarter,Sullivan and Ebbers continually instructed subordinates to to falsely and fraudulently book certain entires in WorldCom`s general ledger and make the adjustments when its company facts failed to meet those expectations (Findlaw, 2002, p.11)
When WorldCom wanted to sell securities to the public in the United States,it was required to comply with some regulations and meet certain requirements according to federal securities provisions law,including the SEC of 1934, were designed to ensure that company’s financial information was accurate, recorded and disclose to the public. (BBC NEWS,2002 a,Online)
Therefore WorldCom according to this regulations,was required to (a) file with SEC annual financial statement audited by independent auditor,(b)device and maintain a system of internal accounting controls sufficient to provide reasonable assurance that the company’s transactions were recorded as necessary to permit preparation of financial statements infirmity with general Generally Acceptable Accounting Principles and other applicable criteria. (Findlaw, 2002, p.19) (c)make and keep books,records and accounts that accurately and fairly reflect the company’s business transactions and (d)file with the SEC quarterly updates of its financial statements that disclosed its financial conditions and the results of its business operations for each three-month period. (Findlaw, 2002, p.20)
The quarterly and annual reports in 2000 third quarter and 2002 first quarter by WorldCom financial statement reflected described fraudulent adjustment in its expenses and revenue which violated SEC requirements.(Findlaw, 2002, p.22)
The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 legislation was introduced to to regulate changes in financial practice and corporate governance .Its purpose is to protect investors and the public by providing accuracy and reliability of corporate disclosures made pursuit to security laws,and for other purposes. Deadlines were put in place for failing to compliance with the said laws. (Sarbanes-Oxley Act, 2002, Online).
The most pertinent compliance section are; section 302,it certifies that the reports published should not contain any untrue statements,omission of materials or misleading information. Signing officers must review the reports, and responsible for internal controls and report their findings within 90 days. (Sarbanes-Oxley Act, 2002, Online).
Financial statement must be presented fairly and true of its position,any significant changes in internal controls that have a negative impact, must be reviewed with urgency. Section 401,states that financial statements should include all material facts,balance sheet liabilities,and accounting principles must be acceptable. (Sarbanes-Oxley Act, 2002, Online).
In section 404;registered accounting firm is required to publish information on their annual reports concerning adequacy of internal control structure and procedures for financial reporting, and effective of this internal controls and procedures must also checked. This firms should attest to and report on the assessment of the effectiveness of their internal control structure and procedures for financial reporting.
Section 409 states that disclosure of information on any changes in their financial condition or operations and must be presented in simple terms for the general public to understand supported by trend and qualitative information on graphic presentation appropriately. (Sarbanes-Oxley Act, 2002, Online).
In section is 802 which imposes penalties of fines and up to 20 years imprisonment for violating accounting policies like falsifying records documents or tangible objects with intention to obstruct evidence,altering,destroying, mutilating,concealing information in relation to accounting records. (Sarbanes-Oxley Act, 2002, Online).
Few titles which are enlightened in this act are (1)Public company accounting oversight board title (2)Audit independence regardless on conflicts of interest which arise earlier in WorldCom because of their different opinions of the auditors. Title (3),corporate responsibility;strict measures on directors bars and penalties, fair funds for investors,corporate responsibility for financial reports. Title (4);enhanced financial disclosures like periodic reports quarterly, revealing transaction involving management and principal stockbrokers like in WorldCom the directors were said to have sold there shares in discovering the company was undergoing liquidation.
The management should constantly assess internal controls. Title(5) analyst conflicts of interest in registering securities. Title (6) states that commission resources and authority,federal court imposing penny stock bars,dealers and brokers should be qualified in dealing with publics finances. Title (7),studies and reports on enforcement actions,reports on violators and violations on different offenses, reports regarding credit rating agencies. Title (8), corporation and criminal fraud accountability, different sections in it states that, criminal penalties for altering documents by accountants and subordinate staffs,penalties for defrauding shareholders of public traded companies,protecting employees who provide evidence in this defrauded public companies.
Title (9) White collar crime penalty enhancements,violation of employee retirement income security act of 1974 by fraudulent companies,attempts and joining in conspiring to commit criminal fraud offenses like the WorldCom`s secretary Scott D. Sullivan who conspired with Bernard Ebbers in publishing false statements about the company. Corporates should be responsible for their own financial reports regardless of its separate legal entities.(Sarbanes-Oxley Act, 2002, Online).
Title (10) Corporate tax returns should be signed by chief executives which makes them fully responsible in case of misleading information. Title (11) Corporate fraud and accountability, explains that the corporate should be responsible for the frauds caused by its accountants.(Sarbanes-Oxley Act, 2002, Online).
Purpose of Ethics in Accounting Profession
The purpose of accounting ethics in a company is to make directors,executives and all the subordinates responsible for violation of company’s laws and regulation are followed accordingly and thereafter penalties awarded in case of their breach. This provides foundation of which the company exist. ( Duska ; Duska 2008)
When company officials engage in unacceptable behavior like overestimating its profits to mislead investors, punishments are awarded like imprisonment up to 10 years,this strict measures prevent executives from engaging in such acts. The acts are put in place to protect the investing public because they entirely rely on that information for their investment decisions, without this measures their interest will not be protected. (Murphy, 2003, Online)
The government should have also a clear overview of the companies activities for political reasons and to protect its citizens and make sure they operate within the given laws,shareholders to know the companies position in handling their investments. On the other hand creditors have interest in companies activities because its concerned in lending purposed, so in case it goes under liquidation,all is not lost and its capability in repayments of the loan.(Murphy, 2003, Online)
The Value of Practicing Good Ethics in Accounting
The value of practicing good accounting ethics in business environment is to gain investors confidence at all times, its easy for the public to invest a lot in the business without being worried of loosing their money in stocks. Companies with good ethics can easily access funds with creditors because they are trusted to repay back the loans and attract foreign investments as well. (Murphy, 2003, Online)
Employees of the company need not to worry about loosing their future savings in case the company goes into liquidation,so they don’t need to get transfers for fear of their future securities. The company’s accountants with good reputable company with good ethics need not to worry his practicing certificates withdrawn unlike to fraudulent corporations. (Murphy, 2003, Online)
Important of Ethics in accountings
The importance of Ethics in accounting, It provides discipline with the staff members in regulating day-to-day running of company activities. Everyone is held accountable for breach of any act regardless of their financial position in the business, even the conspiring individuals are not left out on that. Internal control system should be checked out regularly to ensures every procedure is not omitted. Its also important that its known to them that they are handling publics investments not private interest . (Murphy, 2003, Online) (Duska ; Duska 2008)
Arthur Andersen ; Co., (1987).”National Commission Fraudulent Financial Reporting, Summary of Recommendations,” Accounting News Briefs, Vol. 13, No. 2 Supplement, April/May , p. 4.
BBC NEWS. (2002 a) WorldCom: Wall Street Scandal. Retrieved from
; http://news.bbc.co.uk/2/hi/business/2077838.stm ; Accessed on May 21
BBC NEWS.(2002 b). Enron Scandal at-a-glance. Retrieved from
Duska, R., Duska,B.S.(2008)Accounting Ethics. USA. Rosemont College
Findlaw (2002) United States of America v. Bernard J. Ebbers. S3 02 Cr. 1144 (BSJ)2002. 1-31
Murphy, S.I.(2003).A Fresh look at Accounting Ethics. Accounting Horizons,vol.17
accessed on May 21, 2008.
Sarbanes-Oxley Act (2002) Retrieved from http://www.soxlaw.com/ Accessed on May 21, 2008.