Accounting ethics have been believed as difficult to control as auditors and accountants relies on the gathered information to audit while ensuring maintained employment at the company. Due to various accounting scandals with the profession, critics have led to improvement in standards of professionalism while stressing on ethics.
The most significant accounting scandal to have ever happened in the United States was from the Enron Corporation. It was the world’s leading Energy Company established in Texas, USA. The scandal revealed a need to have significant reforms in the area of accounting and corporate governance. This problem also ignited the need for instituting ethical quality checks as part of the organizational inherent culture. It’s illegal and unethical business practices led to creation of Serbanes-Oxley Act of 2002.
In 1990, the CEO of Enron, Jeff Skiing appointed Andrew Fastow as the senior accountant. He begun establishing a number of limited liability special purpose entities though, it was a legally acceptable business practice. However, this allowed the company to transfer its liabilities in such a way that it would appear in its accounts, thus maintaining a robust and generally increasing stock price that kept its critical investment grade credit rating.
The company grew wealthy due to its promotional power and its high stock price and got named as Fortune Magazine’s most innovative company for six consecutive years. The company’s methods of accounting were creative and systematic and its financial statements and accounting practices were unclear. For instance, it had a tendency of booking costs of some of its cancelled projects as assets with an explanation that there were no official letters indicating its cancellation. In addition, the company created offshore entities to avoid taxation and increase its profits. These practices had a snowball effect and allowed the management to move currency and conceal its losses.
Strategies that may have prevented the problem
Alteration of accounting regulations could have prohibited the ownership of both auditing and consultation services by one accounting firm. Currently, accounting firms have moved to sever their consulting services, and the SEC should adopt additional requirements in disclosure of transactions. Directors must be vigilant and protect the whistleblowers that bring unethical issues to public attention.
All organizations should make ethics as part of their culture and train employees to believe that success is possible by being ethically responsible. In addition, the government should increase the severity of penalties on unethical behaviors.
McLean, B., & Elkind, P. (2003). The smartest guys in the room: The amazing rise and scandalous fall of Enron. New York: Portfolio.