Ethics and Accounting - Financial Decision-Making Ethics

Ethics and Accounting - Financial Decision-Making

Ethics in Accounting and Financial Decision Making

The article Ethical guidance and constraints under the Sarbanes-Oxley Act of 2002 by R.M. Orin (2008), espouses the belief that the Sarbanes-Oxley Act did not go far enough in its desire to stop unethical financial practices by businesses. The article addresses what the Act actually does, which is to help companies practice more due diligence and lessen the chances of getting involved in unethical financial practices. The Sarbanes-Oxley Act involves important legal issues. The due diligence is one of those issues, but another is the need for accountants and lawyers to report the corporations they work with for wrongdoing if they see or suspect a serious financial issue (Coffee, 2002). This has been a concern for some because it technically compromises the attorney-client privilege. This was necessary, though, in the face of all of the corporate scandals that came to light (Koehn & Del Vecchio, 2004). If those scandals had not been so serious and all-encompassing for such a large number of people, the issues that were covered by the Act may not have been nearly as significant and may not have left such a lasting impression on the financial world.

Even though the Act was written quickly, it was designed to protect as many people as possible. For example, the pension plans of people who work for companies that collapse (in the way that Enron did) are now protected. The reason the issue was so bad for the Enron employees is that all of the money that was put into the pension fund was used to buy stock in the company. When the company collapsed and the stock price plummeted, there was no money left to pay the pension because the stock was not worth anything anymore (Koehn & Del Vecchio, 2004). Naturally, that was a serious problem and it left a large number of people devastated. They thought that they would be able to retire, but because of what Enron did, that was not the case. It happened with other companies, too, and was not limited to the collapse of Enron. The large number of companies that collapsed and were damaged beyond repair because of shady financial dealings caused the Act to be put into place, so the people who suffered and lost their pensions were at least able to help others avoid that kind of fate. That may be small consolation, though, at least on a financial level.

However, despite all of the things that the Act addresses, it does not go as far as it could have in protecting individuals from unscrupulous companies and their faulty accounting practices. Currently, the Act calls for auditor rotation that is mandatory - but only for the lead auditor in the firm. All of the other auditors who normally work with the company can remain the same, and that is something that Orin (2008) believes should be changed. Orin (2008) goes so far as to state that the audit firms themselves should be rotated, in order to avoid many of the problems that appeared in the past. The public accountant is supposed to remain independent, and that is very difficult to do when a particular firm (and accountant or group of accountants) consistently work on the same company's tax forms and other accounting concerns. It can lead to dishonesty and unethical practices in some cases, which can mean damage to the accounting firm, the company, and that company's stockholders and employees - many of whom never saw it coming.

Ethical decision making in financial matters - and other areas - is highly significant for any company. Unfortunately, it can be easy to get into habits or patterns that are unethical because they can help to advance the company and make it appear to be more profitable. That, in turn, can bring in more business and get people to invest in the company or see it as a serious contender in the marketplace. When the problems are eventually discovered, however, there can be a serious issue that will work its way through many different levels and cause untold difficulties for dozens or even hundreds or thousands of people. That can happen whether the organization is large or small, and it is something that should never take place. When someone notices it, they are often unsure what to do because they do not want to be the whistleblower. Doing so is the right choice, because any problems with finances - especially from the standpoint of ethics - should be caught and brought to light as soon as reasonable possible. That will lessen the extent of the damage.