Review of Accounting Ethics

Review of Accounting Ethics

Organizations have been in the limelight over accounting ethical breaches, an example is the accounting ethical breaches that happened at Enron in 2001. It is worth noting that Enron scandal was not the first case and not the last case; there have been similar accounting scandals in diverse organizations. Accounting scandals have affected employees, customers and the general public (Pakaluk & Cheffers, 2011). The government of the United States has responded by placing regulations in protecting the shareholders. An example of the regulations is the Sarbanes-Oxley Act that protects and offers corporate oversight to the rights of shareholders. The board of directors is expected to take full responsibility of any accounting scandals within organizations. Sarbanes-Oxley has been influential in uncovering Chief Executive Officer’s (CEO) ethical violations (Duska et al, 2011). A number of CEOs have ended up in the jails due to accounting scandals.

Kenneth Lay of Enron is one of the most recognized CEO’s failures in the accounting practice in the United States. Enron scandal was one of the highly publicized, basing on its magnitude in the violations of the accounting ethics. Failure of Enron led to the failure of Arthur Anderson firm that was also recognized for auditing in the United States (Duska et al, 2011). Securities and Exchange Commission (SEC) was the body responsible in investigating Enron scandal, before the scandal came into the public eye, the shareholders and analysts had noted the abnormal behavior of the organization. Bankruptcy of Enron resulted after the investors in the organization lost confidence; the credit rating also significantly dropped which led to the write down of the organization (Sterling, 2002).

SEC went ahead in prosecuting Lay and Jeffery Skilling who was the former CEO and Andrew Fastow who was the Chief Financial Officer (CFO) and also prosecuted high profile employees. Charges against the former leaders at Enron included manipulating accounting rules knowingly and also masking huge liabilities and losses in Enron. Skilling and Lay faced forty six counts among them being; bank fraud, money laundering, conspiracy and insider trading among others. Skilling got convicted and sentenced for more than twenty four years in the United States prison; he was guilty of nineteen counts.

Lay on the other hand got convicted of fraud and faced six counts; he was jailed for forty five years in the United States jail (McLean & Elkind, 2004). The death of Lay came in 2006, which was three months just before the set sentencing hearing. Sarbanes-Oxley Act was a product of Enron scandal. The congress took the active measures in averting a similar scandal, with the intention of enhancing accountability among the corporate; little did the United States government realize that WorldCom was next; with an accounting scandal, headed by Bernard Ebbers as the Chief Executive Officer in the organization. WorldCom’s scandal was larger than the scandal that happened in Enron. Ebbers was sentenced for twenty five years in 2006 and sent to the federal prison (Pakaluk & Cheffers, 2011).

Basing on the new regulations in the regulatory and business environment, like the Sarbanes-Oxley Act among others has made it real in protecting the shareholders in corporations, the fact that leaders involved in corporate ethical frauds faced legal responsibilities, corporate leaders in the recent times have become more responsible in addressing accounting issues.

The financial statements were confusing and at the same time complex such that the auditors could not detect the anomalies with ease. Analysts and the shareholders could not figure out the financial statements, this was done intentionally in making sure that the leaders carried out the illegal practice undetected (Pakaluk & Cheffers, 2011). The business model was also complex, a feature that facilitated the unethical practices. Enron used minimal accounting resources, misrepresented earnings, balance sheet was modified and the business model was disfigured to look favorable (Duska et al, 2011).

Accountants at Enron exploited the week points at Generally Accepted Accounting Practices (GAAP) for their personal gain; the accountants were smart to an extent that the auditors could not detect the system and the anomalies. The unethical practices in Enron resulted to bankruptcy of the organization (McLean & Elkind, 2004). The leaders at Enron were just concerned on profits in the organization irrespective of any unethical practices. The leaders heavily focused at Wall Street expectations in a way it compromised safety of Enron. The organization engaged mark to market accounting which focused at elevated market values. The debts were hidden by the creation of balance sheet vehicles and financial structures that were complex (Pakaluk & Cheffers, 2011).

As the Chief Financial Officer (CFO) of Enron, I could have advocated for the adoptions of International Financial Reporting Standards (IFRS) and engaging different auditors to work on the financial statements (Sterling, 2002). Avoiding ethical scandals is always good to engage a code of conduct, model the behavior in the organizational culture, disclose any arising issues of conflicting interests, recuse the leaders, getting consent, devising alternative models, avoiding unclear deals or issues, focusing at the issue and not focusing at the persons, enhancing ethical approach, documenting important matters and blowing the whistle (McLean & Elkind, 2004). Leaders in organizations have to protect the interests of the shareholders and in making sure that the reputation and suitability of the organization is enhanced.

References

Duska, R. et al. (2011). Accounting Ethics. Hoboken, New Jersey: Wiley-Blackwell.

McLean, B. & Elkind, P. (2004). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio Trade.

Pakaluk, M. & Cheffers, M. (2011). Accounting Ethics. New York: Allen David Press.

Sterling, T. F. (2002). Enron Scandal. Hauppauge, New York: Nova Science Publishers, Inc.

 

 

 

 

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