Ethical Behavior In Accounting

Abstract

This paper explores the ethics of accounting and why ethical behavior in accounting professions is important to different stakeholders in business. An accounting scandal will be examined for unethical behavior. New regulations and reforms that have been introduced to help combat unethical behavior will also surveyed. In closing this paper will consider the biblical implications of accounting. Ethics in Accounting

Importance of The Accounting Profession

Accounting is important in business so that management, creditors, investors, potential investors and other consumers of a company’s financial data can make informed decisions. Management of a company uses financial data to budget, analyze trends and plan future operations. Creditors,

Incorrect or falsified statements can cause severe economic and legal consequences. Fraudulent accounting is disastrous for all who are involved. According to Kedia and Philippon (2009), “The market-adjusted return over the three days surrounding the announcement of a restatement is associated with an average return of -10%” (p. 2169). The case of the Enron scandal, which is discussed later in this paper, demonstrates this loss on stock prices. A decline in the stock price from above $30 to less than $1 occurred between October 16, 2001 and November 28, 2001 after the company announced a restatement to earnings for the 1997-2001 periods (Kedia & Philippon, 2009, p. 2169). The company and employees who are involved in fraudulent accounting practices can expect to lose their jobs, face civil suits and fines, as well as criminal charges that carry penalties of lengthy jail

A once booming energy company had to declare bankruptcy due to unethical accounting practices. Enron saw their stock climb in the years 1999 and 2000 by 56% and 87% respectively. However, within a year Enron’s fell from glory and the stock price dropped less than $1. “Despite [an] elaborate corporate governance network, Enron was able to attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels” (Healy and Palepu, 2003, p. 3). Enron was able to hide billions of dollars in debt from failed deals and projects using special purpose entities and poor financial reporting. One use of controversial special purpose entities used by Enron was to “buy out a partner’s stake in one of its many joint ventures. [Without showing] any debt from financing the acquisition or from the joint venture on its balance sheet” (Healy and Palepu, 2003, p. 11). In addition, Enron “violated accounting standards… and was able to avoid consolidating these special purpose entities. As a result, Enron’s balance sheet understated its liabilities and overstated its equity and its earnings” (Healy and Palepu, 2003, p. 11). This scandal also led to the downfall of the accounting firm Arthur Andersen due to Enron executives pressuring the firm to ignore issues during their audits and the firm shredding