The business environment can be a cause for unethical practices and behavior in accounting. An example of this can be management instructing an employee to record a transaction in an incorrect manner. It can be as simple as a company whose clients sign a contract on December 1, 2012 for the year. Then reporting the revenue for the whole year in December instead of just reporting the month of December as would be the requirement of accounting principles (Kendra, 2013). Another cause for unethical practices or behaviors can be greed.
Some people will do anything, including breaking the law to get extra money. An accountant has an opportunity to “cook the books” (Xaxx, 2013) that can allow they to take a little or a lot. This is very tempting as no one seems to get hurt in the process. At times ignorance of the tax law or regulations about insider trading can be easily misunderstood by inexperienced accountants, which could cause unethical behavior without even realizing it. The role of an accountant is to use information the company provides to gather useful information about the company’s economic affairs.
This can be difficult if there is a conflict of interests. If the accounting firm hired to perform a profit and loss audit finds that the information it has to report will be damaging to their client the accounting firm’s responsibility is to provide accurate information for the shareholders and the public. This could be a conflict of interest because the accountant may feel a loyalty to the company even though the company is paying the accountant the loyalty is to the shareholders and the public. To each person integrity and ethics can mean different things.
This can cause business situations to be approach by different ethical vantage points. The American Institute of Certified Public Accountants (AICPA) has developed ethical conduct standards so that employees can have an understanding of ethical behavior (Vitez, 2013). In 2002 the Sarbanes-Oxley Act was passed. This act came about because of several large corporate scandals. This act was passed to provide further protection to the public from unethical accounting practices. The act created the Public Company Oversight Board.
It required companies to institute internal control systems and have those systems assessed annually through outside audits. It included provisions on auditor independence, audit partner rotation, enhanced financial disclosures, and senior executive sign-off on financial reports (COHN, 2012). The Sarbanes-Oxley Act implemented enhanced disclosure of off-balance sheet transactions, disclosure regarding the use of non-GAAP financial measures, and public reporting on companies’ internal control over financial reporting by both management and auditors (Donaldson, 2005).
Each reform is important in its own right, but the reform under section 404 has drawn the most attention. Section 404 is the requirement that management installs and assess the effectiveness of internal controls over financial reporting. Also the company is to have external auditors attest to and report on that assessment. Investors use financial statements in making their decisions. For them to have reliable financial statements and other financial information it is important for the company to have an effective system of control over financial reporting.
The system can help to identify potential weaknesses and deficiencies in internal controls. Good internal controls may also help in deterring fraudulent financial or accounting practice. The more open a company is with their policies and procedures and showing that no one is above these guidelines can instill in an employee that the company has good ethics and behaviors. A company that has policies and procedures in place and provides easy access to these guidelines will have employees who understand what type of ethics and behaviors are accepted in the company.
COHN, M. (2012, July 27). AccountingToday. Retrieved from Congress Examines 10-Year Legacy of Sarbanes-Oxley: http://www.accountingtoday.com/news/congress-sarbanes-oxley-anniversary-63434-1.html Donaldson, C. W. (2005, April 21). U.S. Securities and Exchange Commission. Retrieved from Testimony Concerning the Impact of the Sarbanes-Oxley Act: http://www.sec.gov/news/testimony/ts042105whd.htm Kendra. (2013). Chron. Retrieved from Ethical Dilemmas in Accounting: http://smallbusiness.chron.com/ethical-dilemmas-accounting-3740.html Vitez,