Law assignment help in:Ethical issues & Enron Scandal
Executive Summary
In this report three ethical issues in accounting choice have been discussed. The three issues are there in accounting activities such as illegal activities in accounting choice, unethical activities in accounting choice and socially unacceptable issue in accounting choice. The illegal activities in accounting choice have been highlighted with the help of Enron Scandal. The unethical activities in accounting choice have been highlighted with the help of Satyam scandal, Toyota scandal and Enron Scandal. It is observed that ethics in accounting plays a very important role. The various features of ethics in accounting such as transparency, confidentiality, code of conduct, collaboration and consideration which helps investors and employees to receive exact and accurate information about the financial statements. It is analyzed that without implementation of ethics in accounting it would become difficult for financial committee and group to create the belief between business entities and consumers (Daroca, 2010). It has been observed that from the last few years various scandals took place in Unites states which effected shareholders and investors to lose million of dollars because of receiving incorrect information about companies in which their money was invested. Because of these scandals it becomes necessary to implement ethics in accounting.
The researcher had analyzed that illegal activities took place in companies when accountant understate the financial performance at the time of high growth and overstate the financial performance at the time of low growth. At last ethics plays a very important role because investor and clients depends upon the information provided by accountants. Ethics in accounting provides relevant and complete information about the financial statements of Companies. Ethics help companies in creating a belief and building consumers confidence. If the company does not implement ethics in accounting then it would result in scamming and money stealing (Young& Williams, 2010)
Importance of Ethics
It is observed that ethics plays a very significant role in the business of the company to create belief and build consumers confidence. It can be concluded that when the employees of the business take unethical decisions for their benefits then it can result in scandal and destroy the careers of other employees and companies. There are various features of ethics in accounting such as Trust, Confidentiality, collaboration, code of ethics and considerations. Nowadays the institute of Americans wants their members to follow rules and regulations regarding ethics in financial and accounting matters. It becomes important for the finance committee to share information and ideas which brought up by the employees to maintain ethics in accounting (Fenrick & Patterson, 1993)
Features of ethics in Accounting
The first feature of ethics in accounting is to create transparency in financial and accounting matters and building a trust and confidence among investors, employees and customers.
The second feature of ethics in accounting is to keep the accounting and financial matters confidential and it can be expected from an ethical person that he will not reveal any private financial information about the company to some unknown person. If employees leak the financial information of the company then it would cause great damage to financial structure of the company (Dillard & Roselender, 2011)
The third feature of the ethics in accounting is to create an environment where employees have opportunity to share their ideas and suggestions with finance group and committee (Bailey, Scott & Thoma, 2010)
The fourth feature of ethics in accounting is to maintain code of conduct. It is observed that the institute of Americans requires their members to follow proper code of conduct.
The fifth feature of ethics in accounting is to prevent ethical behavior, because unethical behavior in accounting lead to destruction of companies. If non ethical behavior is accepted by the top executives of the company then it destroys other departments and creates unacceptable corporate culture (Young & Williams, 2010)
Importance of ethics in accounting
It is observed that accountants of the company are required to make accounting policies on day to day basis. Stakeholders of the company have to rely on the information that is provided by the accountants to make well decisions. The decisions engage judgment, and judgment is dependant on individual values. The decision should be made on several criteria’s such as helping others, follow rules and respecting authority (Williams & Elson, 2010)
The principles of ethics are important for the accurate and true implementation of the business over the world. It is observed that ethical principles help in dominating decision making matters if it happens during the business transaction. Without implementation of ethics in accounting it would be very difficult for financial committee to run business and create the belief between business of the entities and consumers.
For example Egoism is the self interest that is appropriate for all individuals. It can be concluded that egoism plays a very important role in accounting because an individual in his proper mind shall not trust the bank if bank will misuse his money (Cynthia & Moddy, 2010)
It has been observed that from the last few years various scandals took place in Unites states which effected shareholders and investors to lose million of dollars because of receiving incorrect information about companies in which their money was invested. It can be seen that the scandal of Enron was the recent example of unethical practices in accounting which caused negative effects such as shareholders lost their 25 billion of assets. Another example is the closure of Anderson auditing firm which caused consequent loss of approximately 85000 jobs. The loss of 85000 jobs became socially unacceptable for the society. To resolve all these types of issues it becomes important for companies to implement ethics in accounting choice. Ethics accounting is not only relevant to private companies or individuals but also relevant to public companies. Ethics in accounting helps in reducing or eliminating serious problems when incomplete information is given to the individual about the business. At last ethics in accounting helps the society by saving money and job of the individuals (Cynthia & Moody, 2010)
Ethical Considerations in Accounting Choice
Ethical considerations in accounting choice has three parts such as
It is observed by researchers that ethics plays a very important role in accounting because many clients of the company depends upon the information provided by the accountants in various areas such as preparation of financial statements ,preparation of tax statement and financial consulting. Without having ethics in accounting, accountants can mislead clients and put stakeholders and creditors at risk. Illegal behaviors in accounting decisions can be seen in the famous case of Anderson and Enron (Gaa, 2010).In this report various cases have been described to discuss the ethical considerations in accounting choice. The Enron Scandal has been discussed to highlight the illegal activities in accounting decisions. The Satyam scandal, Toyota motor and Enron scandal have been discussed to highlight the unethical practices in accounting activities (Fenwick & Patterson, 1993)
Many ideas of ethics recommend themselves in relation with the misrepresentation of finance reporting. The structure of accounting procedure shares many characteristics with a structure of law prevailing from system of legal and justice. There are three ethical issues in relation to accounting such as
Socially Unacceptable Decisions in Accounting Choice
Illegal Decisions in Accounting Choice
Unethical Decisions in Accounting Choice
Illegal decisions in accounting choice
The researcher had analyzed that illegal activities took place in accounting department when the accountant of the company understate the financial performance of the company in high growth period and overstate the financial performance of the company in low growth period. Issuing of debt in distressed firms may also effects the decisions in accounting choice. It has been observed by the researcher that CEO of the company wants to show his income less when the company records bad financial management. The management of the company has also done illegal activities when they face with large accruals at the time of dividend reduction. The researcher had analyzed that companies who are facing financial distress they can make decision which can affect the society and jobs of employees. In Enron scandal the management of the company hid a large portion of debt and treated it as revenue. When scandal came in front of everyone then it resulted in loss of jobs of employees.
There is an example of the company which made illegal practices in accounting system.
It is observed that the Enron’s company involved in business risks like fraud, the company failure happened when it entered into conservative transactions. The problem faced by the company on the accounting practices and procedures because the company treated loans as the revenues and did not treat them as current liabilities such as accounts payable. The risk faced by the company that it did not show creditors as liabilities and mislead customers and investors. Apart from this other risk faced by the company is that it losing all its customers and investors because the company continued to convert the customers and investors cash into its shares. At last because of this the company had lost it reputation among the society and faced a situation of liquidity crisis (Gaa, 2010)
It is observed that the Enron Company had done illegal activities by hiding a great amount of Company liabilities. The company was treating liabilities as revenue and did not show them in balance sheet. The company had taken the help of others in hiding a large amount of company debt. With the help of LJM2 Enron company had deconsolidate its unproductive assets which generated annually 30 percent revenue to the company. The company has entered into partnerships with various enterprises for hiding a large portion of debt .It is also observed that with the help of Whitewing Enron was able to sell its assets of energy production. The company had made an announcement to the guaranteed investors of the Whitewing if they sell their assets to Enron at a low price then they would be compensated with common stocks of Enron. At last all the partnerships and help from others were basically done by the company to hide a large amount of debt and to show that the company was in profit.
Unethical decision in accounting choice
The researchers had analyzed that accounting is called as business language. According to the American perspective accounting is defined as that provides information about the expenses in monetary terms which helps the company in decision making and planning.
It is observed by researchers that unethical decision in accounting choice had taken place in Enron Company. According to researchers the company was responsible in hiding the claim of mischief Mr. Ken Lay (Young &Williams, 2010). In general all other accounting firms had blamed accountants of Enron and the company for the scandal in hiding the claim of the mischief. The scandal took place in Enron made other accounting firms to disrupt the lives of investors and employees. This example can show that if the company does not use ethics in accounting decisions then it would result in scandal and disruption of life of investors and employees. It becomes essential for companies to follow proper financial reporting in order to avoid scandals (Young & Williams, 2010)
There is another famous example of Satyam which shows that unethical activities took place in accounting activities. The disaster took place in Satyam has spread shockwaves throughout the world. The chairman of Satyam Company has shown unethical behavior by overstated the amount of revenues by 28% and earnings by 125m in financial statements. These all mischief done by the chairman had made the company in difficulty and placed a question over the world that the company will continue in the future or not.
There is another example which faced unethical decision in accounting choice. It is observed that a Toyota motor is having highest shares all over the world. But recently the company has faced high problems and resulted into crisis because of unethical decisions. In year 2000, the company had extended its line of production with new 17 production sites. The non sustainable production became problem for the company to purchase parts of auto from subcontractors and therefore procedure became difficult in the quality process. Due to high competition the company was in pressure to reduce the price of production. The decisions taken by the company were criticized as unethical because decisions were set off against plans of profitability which showed that the company was in loss. After all this the company had a very careless approach in reply to these complaints. But after facing huge burden from customers and media the company had accepted the truth and called various vehicles for rectifications. The various consequences of unethical decisions in the company are as follows. The first consequence is that the company had faced increased cost of vehicles in addition to 2 billion. The second consequence is that the company had lost its share of market because of unethical decisions. The third consequence is faced by the company was fine imposed by the government of US.
Socially unacceptable decisions in accounting choice
The researcher had analyzed the accounts of statewide referenda in different states to analyze the public responses to predicaments of political nature. The researcher wants to draw the difference in their implementation of accounting strategies. This shows that the change in accounting policies caused socially unacceptable decision in accounting. Nowadays social accounting plays a very important role in order to find out the environmental cost to the interest of creditors and stakeholders (Daroca, 2010).
Nowadays it becomes important for the business to accept the challenges that have been placed upon them. It is observed that corporate social responsibility is used by the companies to integrate and coordinate the economic and social purpose of the society.
The researchers had analyzed that the Satyam was not able to implement the CSR properly. The failure behind the CSR was that the company boards of directors were not harsh and the financial debacle made the people not to invest in Satyam shares anymore. According to researchers mischief done by employees in financials statement of companies results in loss of millions of jobs which indirectly affects the individuals of the society. The loss of millions of jobs took place in United States due to Enron scandal and closure of Anderson auditing firm. The situation of unemployment and loss of jobs due to unethical behavior of employees in companies is not acceptable by the society. When Enron Scandal and closure of Anderson firm took place in United States, employees of both companies were not ready to accept the unemployment situation. At last Enron Scandal and closure of auditing firm affected the society, because individuals are part of society and plays an important role.
Conclusion
A main reason of quality of financial reporting is to make policies and procedures which are used to measure events and proceedings. It is concluded that ethics in accounts choice results in integrity and professional judgment. The responsibility of accounting policies is to ensure ethical guidelines to the company. The responsibility of accountants is to provide the services to the clients in the right manner. The various issues had taken place in the company such as socially unacceptable in accounting choice, illegal decision in accounting choice and unethical decisions in accounting choice. To resolve these three issues the company has started to implement ethics in accounting which helps clients and customers to receive accurate and exact information about the financial statements. The Enron Company had made illegal choices in accounting decisions by hiding the details of long term liabilities and treated liabilities as revenue. The unethical decision in accounting decisions had also reflected in Enron Company because the company has hid the details of the mischief from the society. When other accounting firms get to know about unethical decisions in Enron Company they started to make disruption in the lives of accountants and investors of the Company. Nowadays these scams are very common because managers and accountants of the company want to have their own benefits rather than company benefits. It can be solved by proper implementation of ethics in accounting to ensure that all the managers and employees will follow rules and regulation. Employees of the company will maintain confidentiality of private information which is crucial to the company (Daroca, 2010). At last ethical principles becomes necessary to conduct the business of the company in the right manner. Egoism plays a very important role such as individual in his right mind will not trust the bank if bank is going to lose the money. Ethics principle ensures the individual that his money is safe in the bank. If the company does not implement the ethics in accounting then it would result in scamming and money stealing. This thing has been already noticed in the case of Enron Company which results in unethical decisions in accounting (Dillard & Roselender, 2011)
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