Conflicts of Interest in Corporate Accounting

Ethical Challenges

Table of Contents

Introduction: Impact of accounting on corporate performance 1

Ethical Challenges Faced to Maintain Cost Accounting 1

Ethical Issue in Cost Accounting 1

What are the Factors that Influence Ethical Behavior in Cost Accounting? 2

Conflicting Interest and Corporate Influence to Maintain Performance Measures 2

How Does Self-Motivate Interest Lead to Unethical Decisions? 2

Direct and Indirect Conflict of Influence by Corporations? 2

Conflicting Interest and Corporate Influence 3

Impacts of Budgeting and Financial Reporting Misinformation 3

What Short Term Impact does Misinformation have on a Corporation Financially? 3

Long Term Effect of Misinformation of Corporate Finance 3

Consequences of Unethical Actions 3

Consequences for Unethical Actions 3

How Does the Government Influence Unethical Actions? 4

Discussion 4

Conclusion 4

References 5

Introduction: Impact of accounting on corporate performance

Ethical challenges are routinely faced in cost accounting, budgeting, and performance measures to maintain corporate performance. Accounting helps managers create budgets, understand public perception, track efficiency, analyze product performance, and develop short- and long-term strategies, aided by accounting figures. However, with the increase in international business and expansions, corporations have been plagued with ethical dilemmas heavily influenced by managerial accounting misinformation. Managerial accounting provides corporations with the financial information needed to assess sales data, revenue, operating expenses, and cost of operation. However, managerial accounting has ethical challenges to maintaining performance, conflict of interest, the corporate influence that impacts decisions, and inaccurate reporting of financial data, which leads to a consequential impact on the organizations.

Ethical Challenges Faced to Maintain Cost Accounting

Ethical Issue in Cost Accounting

In cost accounting, the most important factor is honesty: the accountant must be sure to provide factual information, determine the nominal price of goods and products, and always maintain appropriate relationships with others. This final aspect is truly important, especially because relationships can get in the way of doing one’s work honestly. An inappropriate relationship or when where one party is putting pressure on another to report dishonest statements can lead to major ethical problems. Fraud is the biggest mistake an accountant can make. Recording transactions in a manner that is not in accordance with general principles can also lead to trouble. Overall, if one intends to mislead others, one is engaging in fraud—and the poster child for this type of activity is the story of Arthur Andersen and Enron (Brown, 2005; Molyneaux, 2004).

Other issues one can face include misappropriating of assets, disclosure violations, destroying information, manipulating information, interfering with an audit or other investigation, or even having to become a whistleblower when it becomes apparent that management is engaging in fraud. Some important ideas to keep in mind are that historical cost can be more reliable than fair value accounting (Flegm, 2008). As Laux and Leuz (2010) note, some have argued that fair value accounting was partly responsible for the great financial crisis of 2008. Thus, it is very important that cost accounting be approached honestly in every way.

What are the Factors that Influence Ethical Behavior in Cost Accounting?

Attitudes and values within an organization will say a lot about how that organization is managed and what is expected of one (Hofstede, 1998). This is usually the main source influence for unethical behavior in cost accounting. When a company like Enron has a poor and unethical workplace culture built-in, it can corrupt even the best accounting firms, and Arthur Andersen up to that point had the highest reputation in the industry. Other factors that can influence ethical behavior in cost accounting include personal factors, such as greed, desire for influence, or weakness of character and being unable to resist pressure from upper management. Accountants must remember that they have a legal responsibility to represent the facts and truth—not the will of the manager above them or of the board if it is trying to hide data.

Conflicting Interest and Corporate Influence to Maintain Performance Measures

How Does Self-Motivate Interest Lead to Unethical Decisions?

Independence needs to be observed in accounting and auditing (Chen, 2019). Corporations may try to undermine this independence or influence auditing and accounting because they want to project to stakeholders a more robust balance sheet than they actually have. This is fraud, and accountants must recognize when such influence is being used. For example, financial incentives in the form of client services might be something that management offers to an accountant performing an audit, engaging in budgeting, or providing performance measures to maintain corporate performance. This type of influence is meant to reward the accountant for “good” behavior that does not necessarily reflect the true state of the company’s finances. It is bad practice and unethical for the accountant to accept such services. Self-motivated interest leads to unethical decisions because the center or basis of the action is the self and not the truth. The accountant has to service the truth in order to be of any use.

Direct and Indirect Conflict of Influence by Corporations?

Direct influence by corporations might come in terms of a corporation engaging in some kind of quid pro quo endeavor with the accountant, offering the accountant vacation packages for omitting some information from the report, or some other such trade. This is very unethical and should be considered fraud. Other direct influence can come in the form of threats—putting negative pressure on the accountant to withhold information or manipulate information to mislead stakeholders.

Indirect conflict of influence might come in the form of an audit committee lacking independence (Tuovila, 2019). Auditors must be able to approach the accounting with complete independence from the board or any other managers of the company to avoid conflicts of interest. If this separation is not there it creates an environment in which indirect conflict can occur. Another example might be if a manager wants less strict performance measures because the current ones reveal too many problems. He might make suggestions or try to present arguments for why different measures of performance are needed when really the problem is with his management of the objectives.

Conflicting Interest and Corporate Influence

Conflicting interest and corporate influence can give rise to personal ambition to mislead in the accounting for personal gain. A person in a high post may see it as being in his or her advantage to mislead through fraud. If this type of individual is actually representative of a culture of fraud within the corporation it can lead to endemic situation, just like what happened at Enron. Corporate governance is especially important in this regard as it sets the tone and stage for how the corporation will exert its influence both legally and ethically in the matter of accounting (Veasey, 2003). Accountants must always be in compliance and that starts with the level of corporate governance at the top of the organization (CFA Institute, 2019).

Impacts of Budgeting and Financial Reporting Misinformation

What Short Term Impact does Misinformation have on a Corporation Financially?

In the short term, misinformation in accounting has a deceptive impact on the corporation financially. First of all, stakeholders will be misinformed about the status of the company’s current finances. This then may impact how the company engages in budgeting, supply ordering, staffing, and growth projections. If the accounting is not in order the current estimations and guidance will not be accurate. Stakeholders, managers, and investors will have the wrong idea of the company and may make decisions based on bad data. Changing of performance measures to prevent an accurate reflection of performance can also mislead investors and cause them to misplace capital, which can potentially lead to them throwing good money after bad if the performance measures are unsatisfactory.

Long Term Effect of Misinformation of Corporate Finance

The long term effect of misinformation on corporate finance can be disastrous as it was at Enron and Worldcom (Veasey, 2003). It can end up sinking the corporation entirely, as misleading information creates a shaky edifice upon which the company continues to build. If, for example, the company is using misleading data to get loans for growth, those loans will not be able to be paid back and the company becomes like a Ponzi scheme. When this occurs it can spell the end for a corporation and many companies try to pass themselves off as healthier financially than they actually are—and the end result is bankruptcy and the loss of investment by investors.

Consequences of Unethical Actions

Consequences for Unethical Actions

Unethical actions are illegal in most cases and can result in termination, fines, or even imprisonment. Illegal acts have to be reported to the management of the organization as well as to local or federal law enforcement depending on the crime involved. If the company is going to be honest and fair with stakeholders it has to be sure to take into consideration how important it is to be in compliance with laws at all times. Fraud should never be countenanced. For that reason, consequences for unethical actions are often severe. An accountant who engages in fraud and is found out will almost certainly be fired from his post, and will almost certainly be handed over to police for a proper investigation to be conducted.

How Does the Government Influence Unethical Actions?

The government has made it clear that it does not accept unethical actions in accounting. According to AICPA (2022) rules:

“The disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of the auditor's responsibility and ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality unless the matter is reflected in the auditor's report. The auditor should recognize, however, that in the following circumstances a duty to disclose to parties outside the entity may exist:

a. To comply with certain legal and regulatory requirements

b. To a successor auditor when the successor makes inquiries in accordance with section 315, Communications Between Predecessor and Successor Auditors

c. In response to a subpoena” (AU 316.82)

For reporting purposes, the company should engage in auditing so that it can be in compliance with governance mandates. The PCAOB (2022) states under Auditing Standard No. 12:

“In an integrated audit, the risks of material misstatement of the financial statements are the same for both the audit of internal control over financial reporting and the audit of financial statements. The auditor's risk assessment procedures should apply to both the audit of internal control over financial reporting and the audit of financial statements.”

The government mandates auditing and in this way has a good influence on companies. It can use its authority to deter unethical actions and prevent fraud.