Ethics in Accounting Term Paper

Excerpt from Term Paper :

ethics in the business and accounting communities has been a topic of broad discussion. From the collapse of Enron to the mishaps of Andersen the country has seen the most tumultuous ethical behavior in the history of our nation. The purpose of this discussion is to define ethics and the reasons why ethical behavior is important among accountants and business leaders. We will also explore ethical codes within the accounting and business communities. In addition we will provide examples of corporations that have performed both ethically and unethically. Finally we will focus on what changes need to be made to encourage ethical behavior.

Defining Ethics

Ethics is defined as the science of morality. (The Macmillan Encyclopedia) The Oxford Dictionary of Business defines ethical behavior as "Behavior judged to be good, just, right, and honorable, based on principles or guides from a specific ethical theory. However, ethical theories may vary from person to person, country to country, or company to company."(Dictionary of Business)

Accountants need to practice ethical behavior because the public depends on them to present an accurate picture of a corporation's financial condition. When accountants fail to behave in an ethical manner it can have a detrimental impact on the economy and the lives of employees that work for the corporations.

It is important for businesses to behave ethically because they have a responsibility to consumers and investors. When companies choose to behave in a manner that is unethical the impact can be damaging to stakeholders and the corporation.

Ethical Codes

Ethical Codes exist in accounting and in the business community. According to the American Institute for Certified Public Accountants rule 201 requires that accountants practice four general standards. These standards include Professional Competence, Due Professional Care, Planning and Supervision and Sufficient Relevant Data. (Code of Ethics) The purpose of these standards is to ensure that companies and consumers are provided with the correct accounting information in a timely fashion. Additionally rule 203 states that CPA's can not knowingly present accounting information that does not adhere to generally accepted accounting principles. In other words accountants can not allow their clients to present false financial information to the public or the SEC. (Code of Ethics)

The limitation of these codes is that there is very little accountability. Not to mention the fact that many of the accounting firms that audit publicly held corporations have a conflicts of interests because they also provide consulting services for the corporations. The corporations pay the accounting firms millions of dollars each year in consulting services; in turn the accounting firms feel pressure to portray the financial condition of the corporation in a positive way even if they don't reflect generally accepted accounting principles.

Within the business community the code of ethics is not as standardized. It seems that in the business community leaders will do whatever the public allows them to get away with. The few companies that do behave in an ethical manner often do so because the leaders of the corporation have personal convictions about the way that business should be conducted and they genuinely care about the well being of their stakeholders.

Corporations Behaving Ethically prime example of a corporation behaving ethically is Malden Mills. The ethical dilemma that the company faced came in 1995 when portions of the mill burned to the ground. ("Malden Mills: A study in Leadership") The CEO Aaron Feuerstein had to decide whether or not he would rebuild, relocate or retire. The CEO decided that the Mill would be rebuilt and in addition he decided that he would pay all of his employees while the mill was being rebuilt. ("Malden Mills: A study in Leadership") He also provided his employees with full benefits during the construction of the mill. Even before the fire Malden Mills, which produces Polartec and Polarfleece, was known for treating employees ethically by providing competitive pay and generous employee benefits.

Another example of an ethical corporation is Starbucks. Starbucks sells gourmet coffee all over the world. Starbucks is also revered for the ethical way that it treats employees. Starbucks treatment is especially unique because the company provides full benefits for part time employees, which is almost unheard of in the business world. Starbucks is also known for the high quality of the products that are sold in their stores and the meticulous way that employees are trained.

The final corporation that I would like to discuss is Southwest Airlines. Southwest provides low cost airfares to destinations across the United States. The company's ethics are viewed as outstanding in an industry where profitability is difficult to obtain and where corporations are often consumed with obtaining the bottom line. The airline is known for their outstanding safety record and the fact that their planes are inspected on a basis that exceeds the standards of the industry. In addition, the company is known for the positive upbeat attitude of their employees.

Unethical Corporations

The Enron Corporation has been at the center of ethical debate over the past year. The main issue with Enron has been the accounting principles that the company practiced. In a Washington Post article entitled "Enron Official's Assets Frozen" the post explains that Enron's shotty accounting practices led to the collapse of the corporation.(Johnson) The actions of Enron Andrew Fastow have been a special cause for alarm. The Washington Post reports,

Fastow is a central figure in the investigation of Enron's collapse into bankruptcy last December. He designed several of the Houston energy trader's off-balance-sheet partnerships, which concealed the company's mounting debts and funneled millions of dollars to relatives and friends" (Johnson)

As you know the Enron corporation collapsed leaving millions of people without work. In addition many of the corporation's top executives have been indicted and are facing jail time for their part in the mass deception of millions of investors. The accounting principles of the corporation have brought into question the notion of full disclosure and greatly compromised consumer and investor confidence.

The accounting firm of Andersen was responsible for allowing Enron to perpetuate these questionable accounting practices. The corporation performed unethically because it allowed investors to view financial information that did not reflect generally accepted accounting principles. Eventually Andersen was disbanded by the SEC.

Another corporation that has performed unethically has been Martha Stewart Living Omnimedia. The Martha Stewart who is the CEO of the corporation has been under fire for insider trading. (Creswel) Fortune magazine reports that in December of 2001 Stewart sold 4,000 shares of ImClone stock. (Creswel) It is believed that Stewart received a tip from her broker and from the CEO of ImClone that the corporation was in trouble. Stewart has denied the charges but the corporation is at the center of an ongoing investigation by the SEC. (Creswel)

Why "ethics is good business" and Changes that can be made

The phrase "ethics is good business" rings true because good ethical practices can help a corporation in attracting and keeping qualified employees. Qualified employees are essential to the success of a firm. Moreover, when a corporation practices ethical behavior investors want to contribute to the success of the firm. In the case of Enron and Andersen unethical practices led to the collapse of these corporations. Ethic is good business because it shows consumers that the company cares about more than just profits.

This report has made it painfully obvious that there needs to be comprehensive changes made in accounting. Some of these changes have already taken effect, as the SEC has sought to make certain that scandals like Enron do not occur again. The main thing that needs to be instituted into the rules governing accounting is accountability. The rules set forth by GAAP and the SEC only tell accountants what is expected of them but it doesn't ensure that the accountants will…

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