Mariam Elnidani
232007012
Accounting Ethics
Abstract
This research topic dives into the topic of understanding the
importance of ethics in accounting, by explaining the meaning of
ethics, moral dilemmas and ethical paradoxes, and how they are
relevant in the world of accounting. Ethical conduct, which has
three pillars, is explained with great detail, including extensive
secondary research, obtaining qualitative data about real life cases’
(Lehman Brothers, Parmalat, Satyam) consequences of abandoning
ethical conduct on the companies themselves, and the unfortunate
negative impact on external stakeholders, while understanding the
company backgrounds and the decisions made that lead to those
events.
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Part 1: Understanding Ethics and Accounting as separate
topics and Their Relation to One Another
Introduction
In today’s society, morality, which is a subjective phenomenon, and
an ongoing debate is aGecting several managerial environments.
Accounting departments are no exception. There are many ethical
gray areas that arise in accounting department environments such
as, revenue recognition, expense reporting and conflicts or
interests. With these dilemmas, many ethical questions arise. There
are certain methods of preventing, as well as overcoming, these
issues and navigating accordingly. Examining and assessing certain
situations within accounting, that require an adequate moral
compass, is an admirable, yet necessary and vital skill needed. In
order to become a successful accountant. If an accountant in
practice fails to recognize this, there may potentially be reputational
and legal consequences.
What is Accounting?
Accounting is the process of examining and recording financial
transactions within a corporation or any size firm, whether they are
proprietorships, partnerships or corporations.
Recording transactions can come in several forms like income
statements, balance sheets, journaling, general ledgers and
invoices. The purpose of recording such transactions is to provide
accurately depicted information about a corporation’s financial
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position, while maintaining complete records of the company’s
financial transaction in order to ensure their compliance and
abidance of legal regulations.
Financial monitoring is crucial within companies, especially large
corporations. The larger a business is, the more financial
transactions occur such as, assets like owned land, inventory,
equipment and supplies. In addition, there are expenses such as,
wages and salaries, costs of manufacturing goods, as well as
performing services. Every large firm is expected to have an
accounting department, however, although not as diGicult to keep
up, smaller firms require accounting activities to be performed.
Ethics: Moral Dilemmas and Grey Areas
Ethics is a field of study within philosophy, pondering and exploring
the diGerence between right and wrong, aiming to understand
morality, choosing ethical and moral solutions for problems. What is
considered right or moral, is completely subjective, as in every
person’s perception of what decisions are morally and ethically
correct will vary depending on their personal beliefs and values.
Although there is a general consensus of what is right and wrong,
there are certain moral dilemmas that present philosophical
questions, which may be answered diGerently by scholars with
diGerent philosophical beliefs (existentialism, determinism,
transcendental idealism etc.)
A moral dilemma, also referred to as an ethical paradox is a
situation in which a diGicult choice must be made with no simple
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decision to point to. A paradox, in this context, is a contradictory
statement with implications that there is no clear moral choice to
make, adhering to the ongoing theme of ethics and philosophy,
where subjectivity is apparent. DiGerent people with diGerent
philosophies, perspectives and principles may make diGerent
choices in such ethical dilemmas, or ethical paradoxes.
An ethical gray area is an area of decision making where there is no
clear consensus of what the correct, most moral and ethical,
decision is. It could be a dilemma where every angle results in
making a relatively immoral decision, or a moral decision that
results in negative eGects on the decision maker. It may have
undetermined pros and cons that make the decision-making
process more diGicult to navigate through.
Why Ethics are Important in Accounting
There is a constant and continuous emerging of ethical gray areas
and moral dilemmas in accounting. Accountants must maintain
their vigilance and commitment to upholding ethical standards and
preventing the tarnishing or compromising of their integrity in their
financial systems. The importance of the role that ethics play in
corporate culture is highly pertinent within the accounting
departments of any organization, given their significant effects on
firms on a larger scale, outside of accounting.
Ethical dilemmas can appear in several forms within accounting.
From small, barely significant and easily overcame
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misinterpretations of financial data, to more in-depth scenarios that
may have a severe negative impact on an organization if not handled
correctly. The presence of ethical behavior is critical for the
Insurance of fairness, transparency and accountability in financial
systems.
One reason outlining the importance of ethics in accounting is that
it ensures the prevalence and maintenance of public trust in
financial reporting, making investors confident and smooth
functioning of markets. The application of moral values and ethics
are important for every department of an organization, including
accounting of all forms (cost, financial.)
Studies performed, examined in a thesis by Lauren Ghahremani,
University of Arkansas, Fayetteville, Seeking Peace of Mind: A Case
Study Combining Ethics and Accounting, showed that many
accounting educators and practitioners, suggest a way to overcome
moral dilemmas with several alternative solutions in the accounting
profession. Their educated suggestion is to thoroughly discuss and
examine ethical situations, in the form of case studies, to practice
reacting to, and finding effective and efficient solutions to situations
in the classroom, before experiencing real ethical dilemmas in the
business world, within accounting. Embedding/integrating ethics
and philosophy education in accounting theory is a necessity for the
success of individuals in the accounting profession today, in order
to give them skills necessary to be capable of overcoming difficult
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moral dilemmas, which are, especially in todays world, very likely to
occur.
Whistleblowing
Whistleblowing is an importrant tool for ensuring the maintenance
and implementation of ethical standards and keeping ethical
conduct set. Whistleblowing allows employees to formally report
unethical practices without being afraid of retaliation or scolding.
This helps expose and uncover ethical misconduct, or misconduct
of any form for that matter. Many organiations today have strongly
implemented the policy of whistleblowing, which protects
individuals who choose to expose fraudulent activity, or any
unethical acts within an organization by ensuring and maintaining
their annonymity. “Blowing the whistle” refers to disclosing
information, allowing employees to pass on information concerning
ethical wrongdoing, of something they have witnessed at work,
which is typically the case.
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Part 2: The Implementation of Ethics in Accounting:
Pillars of Ethical Conduct
There are fundemental parts of ethical conduct that are applied in
the practice of the accounting preofession that are vital and
necessary. Each pillar of ethical conduct within accounting ensures
an envirnoment of trust and reassurance that the financial
information, and any work presented by an accountant, is reliable
and credible.
Integrity
Integrity is the maintenance of an individuals honeesty and
enforcing of their ethical principles. In accounting, it refers to the
reliability and uncompromised discipline when it comes to sticking
to moral and ethical principles, while not falling under, or cracking
under pressurre to bend the rules by manipulating figures or
misenterpret financial information. The severity of the matter
cannot be undermined, integrity is crucial in the workplace,
including accounting. Lack of honeesty and integrity can lead to
damaging outcomes.
Lehman Brothers Scandal
An example of compromised integrity in accounting fields is when
Lehman Brothers, an American global financial services firm, who
were the fourth largest investment bank until they filed for
bankruptcy (a legal process for firms and individuals who are unable
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to repay their outstanding debts) in 2008. In 2010, were caught, after
being reviewed by a court-appointed examiner using ‘cosmetic
accounting gimmiks’, falsifying information, in order to hide their
debts and make the appearance of their financial health less critical
at the end of every quarter.
Their scandal completely tarnished their reputability and public
image. However, this was not the only negative impact of their
poorly thought out decision to falsify financial information in the
accounting departments, in fact, although severe, it is not nearly as
harsh and damaging as the global effect these practices were. At a
certain point in time, before their downfall and collapse, Lehman
Brothers was a very large company with massive success. As
previously mentioned, they were once the fourth largest firm in the
United States of America. After this scandal, banks became
hesitant to give loans, in fear of accepting loan reequests from firms
and individuals who may end up being unable to meet their legal
obligations. This occurred due to the trust being broken by what was
once a reliable company. They grew more skeptical of publicly
trusted firms. This caused a critical liquidity crisis, and a credit
crunch.
A credit crunch, which is also known as a credit squeeze, credit
tightening or credit crisis, is an unexpected decrease in the
availability of loans, which is exactly what the consequences of
Lehman Brothers’ failure to maintain their integrity lead to. This
credit crunch affected many individuals and consumers, not just in
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the United States, but, unfortunately, worldwide. This case
effectively outlines the severity of potential consequences that
occur when integrity is compromised, and ethical conduct is not
reinforced and applied within accounting.
Transparency
Transparency is the second, also vital pillar of ethical conduct. In
the context of accounting practices, it is defined as being honest in
giving full disclosure of financial information, without withholding
any form of information, no matter how insignificant one may think.
This means subordinates should fully disclose every detail of the
relevent work to their superiors, without leaving out any pieece of
information undisclosed.
Transperancy from accountants ensures the accesibility of all
financial statements and information to stakeholders, investors,
employees and regulators. Without the fundamental
implementation of transparency, companies may suffer dire
consequences.
The Parmalat Scandal
Parmalat is a company that produces and sells dairy products. It
was Italy’s largest dairy company, until it met its demise. The
scandal took place in 2003, when the corporation’s scheme was
exposed. They showed initial signs of trouble, raising some
suspicion. They were unable to pay their obligational 150 million
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euro bond payment. A bond payment is a financial gaurantee issued
on the behalf of a contracter (an individual or firm that undertakes a
contract to provide labor or materials to perform a service or job)
ensuring suppliers are paid for services and materials. Although the
company was publicly known to be highly successful, they
procceeded to raise more suspicion, when auditors (people who
examine, analyze and audit) discovered a 4 billion euro hole in
Parmalat’s accounts.
Their fraudulence was discovered when further investigations
exposed that Parmalat had been falsifying accounts for more than a
decade. Accounts were falsified, with knowledge and involvment of
executives and audits. The company’s scheme involved creating a
network of several offshorre subsidaries (a wholly owned affiliate
incorporated company, whose function is usually, in cases unlike
this one, to issue securities abroad for use in either parent’s
domestic or foreign business) and bank accounts that were made
with the sole purpose of hiding their massive losses, and giving the
illusion and appearance of financial stability and no prescence of
suffering and declining financial health of the corporation.
The reveal of the corporation’s encline of debts, and their unethical
and illegal methods of hiding it, eventually and inevitabely lead to
the arrest of the company’s owner, Calisto Tanzi. The owner was
charged with several crimes; market rigging, false accounting and
obstructing regulatory authorities. The consequences, in addition to
Calisto Tanzi’s arrest, which sentenced him to 18 years in jail and
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the damage to their repuatation, the economy suffered due to the
negative impact the scandal had on the financial market. The
corporation’s bankruptcy lead to loss in investor confidence, similar
to the Lehman Brothers scandal. A decline in share prices occurred
with many investors experiencing severe losses, some losing their
entire investment in the company. Other food and beverage
companies were also impacted by the scandal, as investors
became wary of trusting such companies, leading to a general
decline in stock markets.
This case accurately depicts the dangers of going down the route of
lacking transparency and failing to enforce ethical conduct.
Accountibility
In the context of accounting, accountibility refers to accountants
being responsible for the accuracy and integrity of the company
they work in’s financial statements, even if an error or
misenterpretation was made by someone else in the organization.
Corporate accountants must bee careful and knowledgable, as they
could be held responsible or liable for negligence. Accountants
must be aware of the responsibility of bearing for their actions,
decisions and the resulting outcomes. They must answer to
stakeholders for the financial information they provide or decisions
they make. Abandoning the principle of accountibility will often lead
to serious consequences. This is shown in the Satyam scandal.
The Satyam Scandal
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Satyam Computer Services (now known as Mahindra Satyam) was
an Information Technology services company based in India,
offerring services like software development, system maintainence,
business consulting, outsourcing services and more. It was publicly
recognized as a very successful company, until their fraudulence
was revealed in 2009, making it India’s largest corporate fraud (until
2010.) The founders and directors were found to have falsified their
accounts, inflated the share price and stole large sums from the
company. A large portion of such was invested in properties.
It was initially discovered in late 2008, when the Hyderabad (the
capital and largest city of india state, Telangana) property market
collapsed, which trailed the root of issues to Satyam. Ramalinga
Raju, the founder, needed the money to purchase land. This
presented a growing problem as financial information had to be
doctored to keep showing the appearance of financial stability and
healthy profits. However, every attempt to fulfil this failed.
Ramalinga Raju stated, “It was like riding a tiger not knowing how to
get off without being eateen.” Comparing his string of choices of
negligence of accountibility to riding a tiger, and the inevitable result
of facing legal and reepuational consequences to being eaten by
said tiger. The case was brought to light in 2009, resulting in 10
people being found guilty. Ramalinga Raju, his brother, Saytams
former managing director, former chief financial officer, former
auditors, internal chief auditor and involved employees. Saytam
was exposed ny an annonymous whistleblower, which,as previously
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mentioned, is an individual who can call out or expose unethical
activity of any kind in an organization, protecting them from the
possibility of being retaliated against or faced with any issue, which
is exactly what happened in this case.
Part 3: Conclusion
The navigation of ethical moral gray areas, can be difficult, however,
the three pillars of ethical conduct being kept in place, can manage
accountants’ moral compass and ensure the accounting process
goes smoothly. Those who abandon the prrinciples of ethics, that
are relevant to accounting (integrity, transparency and
accountibility) suffer legal and reputational consequences, as well
as the economy suffering due to investors being wary and banks
being hesitant to lend loans. This is clearly shown is the cases of the
Lehman Brothers, Satyam and Parmalat.
What each one of those cases have in common is, facing jail time.
However, when speaking about ethics, it is important to note that
individuals should not act ethically and morally for the sole reason
of having fear of facing consequences. Ethics play a huge role in
accounting, and many managerial departments. Every professional
accountant should have moral and ethical value, and follow ethical
conduct.
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