Unethical Practices and Behavior in Accounting. Review

¶ … unethical practices and behavior in Accounting. Review the effect of the Sarbanes-Oxley Act of 2002 on financial statements. Identify situations that might lead to unethical practices and behavior in Accounting The company may distort its accounts in order to make its situation more attractive to current and prospective investors. It may distort its accounts believing that economic conditions will be more promising in the future or equivocating one account with another.

Other situations that may result in unethical practices may be the situation of hiring accountants who, even though they are from an external agency, are paid a bonus to audit the financial records of the organization in a biased way. The organization, too, may reward these auditors in other manners, and so, even if not done overtly, the bribery induces the auditors to lean towards the organization and distort the accounts. Furthermore, organizational behavior is modeled and influenced by the general organizational corruption.

Corruption in the workplace implicitly impacts conduct of those who work for the organization. The effects not only of managers but also if co-workers is immense and even if there is no overt pressure for corrupt behavior, covert and unobtrusive pressure -- or the environment itself -- is stimulus enough to influence incorrect rendering of accounts (Gould and Kaplan, 2008). Pressure may come, too, from supervisors or the upper echelon where the threat of demotion or losing one's job may push one to rationalize and produce faulty accounts.

Rationalization is easy: simply disconnecting oneself from the purpose of the job (i.e. The wider purpose aside from that of making money), as well as disconnecting oneself from the customer (in that distorted accounts are misleading the customer) usually aids one in implementing distorted accounts. These are some of the justifications that Hatch (2010) lists.

Others include rationalizations such as prospective or current investors deserve to be misled for whatever purpose (usually because they are greedy); distortion is insignificant and can be explained; distortion will be corrected when company reverts to good times (i.e. It is only for the present / this time alone); and distortion are not hurting anyone The effect of the Sarbanes-Oxley Act of 2002 on financial statements Companies were no longer allowed to self-regulate their accounts.

Instead, the SOX created the Public Company Accounting Oversight Board (PCAOB,) which was empowered by the Securities Exchange Commission (SEC) to regulate the financial accounts of companies and enforce the accounting regulations (Lasher, 2008). The PCOAB investigates questionable accounting practices, conducts disciplinary hearings, and can impose sanctions on firms and individuals who are careless with their accounting practices. The SOX also effected financial statements in that, originally, auditors employed by the firm, frequently, also provided consulting services to their clients. This served as conflict of interest.

Auditors were now no longer allowed to offer clients additional services. Furthermore, auditors originally reported to the CEO or to the CFO. To remove this possible conflict of interest, auditors were not told to report directly to the "audit committee" of the firm's Board of Directors, at least one of whom was expected to be an expert in accounting (Lasher, 2008). The auditing firm, too, could only service the client for a period of 5 years.

Finally, CEOs are required to review and sign the audited financial statements affirming its contents to be true and that they are responsible for the firm's internal financial controls, as well as that they are.