Accounting Ethics Ethics of Accounting

There have been breaches in the ethics of accounting in recent times. With that in mind, evaluate whether or not the current trend in the regulation of business establishments is favorable to ethical behavior. Supply supportive evidence to your answers (Jeter, 2003).

The generally accepted principles of accounting and the standards of auditing in contemporary practice stipulate that the financial statements of any establishment should contain the following for the period being covered by the report: the company's financial standing (balance sheet), earnings (income), cash flows, investments by the shareholders and the distributions that have been made to them. The United States system of accounting has been criticized as rules-driven especially as the standards are determined by FASB and those who were there before them. On the other hand, the international practice in accounting is in favor of a principle-based standard of accounting, and this approach provides general guidance to the art. The efficiency of either system, however, is dependent upon the behavior of the auditors, in terms of ethics. Nevertheless, many researchers believe that the current business regulation favors ethical behavior the more (Jeter, 2003).

Having carried out this research, describe the organization investigated, the breach of ethics in their financial accounting system, and how this affected the organization.

Worldcom started in Mississippi as a provider of long distance small discount. The company was founded by Bernard Ebbers and a host of others whose idea for Worldcom was simple. They were into buying of long distance services from bigger firms and selling them off to small local business outlets. This idea thrived. Eventually, Worldcom, formerly known as Long Distance Discount Services became established. The establishment started buying off small telecommunications companies, and by that grew tremendously. It eventually took a prominent place among the largest providers of long distance services the world over. With the passage of time, Worldcom acquired over sixty companies in which MCI was included. The taking over of MCI in 1997 was regarded as the greatest merger in the history of America because at that time, it was valued at over 37 billion dollars. The MCI merger made Worldcom the second largest in the telecommunications sector in the U.S. 1/3 of the data cables were owned by them, and they handled more than 50% of the internet traffic in America. Worldcom amazed everyone with their growth rate, and Wall Street kept singing about them. Getting to late 1990's, they had already become, in America, the 5th most widely held stock. This is clearly a big feat for a small firm established in the little town of Mississippi. Worldcom was on top of the business of telecommunications as well as internet, and boomed between the middle and late 1990's. They had a record of shares that were worth up to $115 billion and this was over double of that recorded for giants in telecommunications, like AT&T. But by the end of 1990's, a tremendous decline occurred in the telecommunications as well as internet industry. And this marked the beginning of trouble for telecommunications companies, including Worldcom and Global Crossings. Stock prices also began to fall. And Wall Street made some reactions to the sudden decline in these establishments (Jeter, 2003).

And so, in an attempt to keep investors believing in the companies and to make sure the earnings do not fall drastically, some of the telecommunications firms started indulging in fraudulent reporting of their financial status. And Worldcom had been the most infamous of this accounting malpractice. This was how executives at Worldcom got involved in malpractices and unethical behaviors which violated accounting principles that were generally accepted (Malik, 2003).

From the research, discuss how the ethical issues in the organization were detected and the management's inability to reinforce good ethics in the business environment.

The fraud in accounting which occurred at Worldcom had been carried out by some executives of high rank who were responsible for accounting. The accounting fraud had been perpetrated by several top executives, most of whom had been in charge of accounting. The founder and Chief Executive Officer, Bernard Ebbers was at the helm of the fraudulent accounting; and he allegedly instructed the others to ensure that the financial status appeared better than it really was. In addition to that, he also borrowed about $400 million from the company in order to set off the debt on his stock. Scott Sullivan who was the Chief financial officer was in charge of the financial...

He too instructed the staff under him to follow in his footsteps (Malik, 2003).
Eventually, Worldcom could not stay on top of the game of covering the manipulation of their financial reports. And that was how the world's second largest telecommunications company went down the drains due to massive unethical behavior in financial accounting. The Worldcom stock trading ceased in late June 2002. And the news of the scandal in the company's financial reports went far and wide. By July that same year, Worldcom was revealed to be in debt of over $41 billion. At the end of the investigations of the scandal, there was an estimate of $11 billion loss to fraud covering five quarters consecutively. This fraud, bigger than that of Enron, has remained the biggest in the history America (Malik, 2003).

Give an analysis of the accounts including the violated accounting guidelines and the impact of this on the business.

In the beginning, a disguised expense of $3.5 billion which had been done over an extended time period had been discovered. Expenses amounting to $771 million were hidden in the first quarter of 2001. And this had been followed by $610 million within the subsequent quarter; $743 million in quarter after that; and $931 million within the final quarter; along with $797 million at the beginning of the following year. However, Worldcom's financial fraud was uncomplicated as opposed to recent creative fraud styles in accounting. By the dictates of Scott Sullivan, the operating costs had been recorded as capital expenses. This, therefore, converted routine maintenance costs to capital investments, thus making them assets. The issue with taking operating costs in the form of capital investment is that the costs will be forwarded into the future. This basically meant that they hoped for greater revenue in the coming years not caring that they were increasingly decreasing. Making routine expenses capital investment shows that they would not be due immediately, the way operating costs would have been. This approach to accounting made current expenses look lower than what they really are. And so Worldcom, by this, lowered current expenses thereby showcasing higher false earnings. Treating expenses in this way affected both the balance sheet and the income statement. It increased retained earnings on the balance sheet since it treats their recurrent expenses as capital investments. On the side of the income statement, it reduces the expenses thereby increasing their net income (Albrecht et al., 2011).

The second great financial manipulation committed in the Worldcom's account was that revenue was falsely inflated by quoting reserved accounts. They added money from reserve into their profits. The reserve was to take care of unforeseen circumstances that usually come up in the course of running a business. Keeping a reserve account is not bad and many companies do keep one. But in the case of Worldcom, it was alleged that excessive money was pumped into the reserve with the intention of using that to achieve earning goals in the future. In other words, they usually lied about monies at their disposals. But the end point of the reserve was to use that to get back on their feet at the event of their inability to reach their earning goals. They could simply use their reserves to regain the trust of their investors (Albrecht et al., 2011).

While the accounting fraud was taking place, Worldcom took more than $3.3 billion from their reserves and added it to the line of revenue. At this, the investors thought that their company was making gains while in reality, they were not (Jennings, 2011).

Make a recommendation of the measures that could have helped prevent the breach of ethical standards in accounting, and their implementation processes for the future.

There is a major issue in the Worldcom scenario which is the absence of effective internal control. Internal control in an organization is very vital if abuses of different kinds must be eliminated. This will also ensure that business operations go on smoothly. Obviously, Worldcom lacked effective internal control. This gave the top managers the air to do as they wished since there were no effective parameters for checks and balances. This absence kept only a few people in the know of company decisions. So this contributed largely to the accounting manipulations that went on for a long period of time. However, that of Worldcom and recent occurrences of accounting scandals paved way for the institution of accounting laws. And this law stipulates that external auditors must give their separate opinion of the internal controls of an organization before an audit session can begin formally (Jennings,…