Accounting Ethics Essay Example for Free

The research paper of Pflugrath, Martinov-Bennie & Chen (2007) aims to analyze the impact of organizational codes of ethics on the accountants’ and auditors’ judgments and professional decisions making ski...

Accounting Ethics Essay Examples - New York essay

SECTION 6LESSONS LEARNED FROM BUSINESS SCANDALS
What can we take away from all of this? We have looked at ethics and why it is important to accounting students and accounting profession- als. We have reviewed the codes of ethical standards developed in the U.S. and by the International Federa- tion of Accountants. Yet in spite of all the good work that has been done in the area of business and account- ing ethics, there continues to be in- stances of fraud and deception in vio- lation of these ethical principles. In
this final section we will try to learn some lessons from business scandals. We will start with a discussion of some high-profile business scandals that happened in recent years, and then we will think about some lessons we can learn from the scandals. Finally, we will look at the Sar- banes-Oxley legislation that resulted in response to the scandals.
BUSINESS SCANDALS
Lets start by looking at some business scandals in recent years. What exactly happened, what ethical rules were violated, and who was affected?
Enron. This scandal involved the giant energy company Enron. Basically the company overstated its revenues to show a better stock price. As you learned in your accounting classes, revenue is recognized when it is earned. If you sell a product that you own you record the full revenue and subtract the cost of the product to compute your net profit. If you are an agent who is just transferring a product that you do not actually own, then you should only record your net fee revenue instead of the total revenue. Enron recorded the full revenue even though it was an agent in many transactions, thereby overstating its revenues. So, the accounting rule of revenue recognition was not applied properly. Because the CEO and the CFO knew about the overstatement of revenues, they violated the ethical principles of integrity and objectivity. Enrons stockholders lost about $11 billion, and employees lost their jobs when the company went bankrupt. In fact, Enron was the largest bankruptcy in U.S. history until WorldCom.
WorldCom. WorldCom was the second largest phone company in the U.S. after AT&T. The WorldCom story involved capitalizing some costs that should have been recorded as expenses. When you do this you make your income statement and your balance sheet look better than they actually are. Assets are overstated and expenses are understated – profits are inflated. WorldCom capitalized the cost of using other companies communication lines when they should have recorded these line costs as current expenses. The accounting matching principle was not followed and the accountants knew that the way they accounted for line costs was not correct. The ethical principles of professional competence and professional behavior were
Ethical Decisions in Accounting 17
violated. Stockholders lost everything, and creditors lost about 70 cents on the dollar for loans they had made to the company.
Madoff. Bernard Madoff committed the largest investor fraud ever by an individual, estimated at about $65 billion. This fraud involved a Ponzi scheme, named after Charles Ponzi who committed this kind of fraud in the 1920s. Madoff took money from one investor and give it to another investor, calling it profit or return on investment. But he really was just recycling money and there were no real profits on the investments. Of course Madoff knew what he was doing so the ethical principles of honesty and integrity were not followed, and the generally accepted method of recognizing revenue was violated. He got away with this fraud for some time, but in the end, the real profits were not there and the fraud was discovered.
Savings and loan scandals. Banks use investors money to make loans to other people. They give a return to investors and hope to earn more on the loans so they can make a profit. But if the loans are bad then the investors can lose their money. In the 1980s and 1990s, many savings and loan companies made bad loans resulting in losses of over $150 billion, most of which was paid for by taxpayers through government bailouts. The root problem with the bad loans was taking too much risk on loans that people could not afford to repay. Some argue that the government shares some of the blame here by backing up the


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As you will learn from reading Section 6 of the WP Ethics packet, sometimes business leaders, senior management and accounting professionals breach U.S. GAAP and in doing so commit financial statement fraud. Financial statement fraud can range minor overstatement of inventory balances to full-scale fraud that defrauds the public of billions of dollars. At the core of each of these financial statement frauds is the manipulation of the way in which U.S. GAAP is applied to business transaction (i.e. failure to recognize revenue when earned, failure to properly value inventory, failure to properly record liabilities, etc.)