Unethical Accounting Practices
Accounting is best described as a mechanism that measures the economic performance of organizations and provides information about the financial position of such organizations to a number of users such as the government, investors, and shareholders (Weygandt, Kimmel, & Kieso, 2010). The information provided is critical to users as it helps them determine whether to invest or not, whether to approach creditors or not. Therefore, based on its import, it common to find behaviors in the field of accounting that are not ethical as they usually come in varied ways.
In accounting, there are situations that result in unethical practices. Some of these include misleading financial information for personal gains, exaggerating revenue, especially when an underperforming company wants to attract investors. Other situations include misuse of funds, corruption, and manipulation of financial markets, intentionally providing wrong information about expenses, assets, and liabilities (Weygandt, Kimmel, & Kieso, 2010).
Although in some cases, some of these practices are permitted, they are still unethical. They are unethical practices as their main aim is to evade paying taxes or compliance or simply to mislead the general public or investors about the performance of the company. A number of cases of unethical practices in the field of accounting can be deduced. In 2002, two major companies (Enron and WorldCom) in the United States were involved in unethical practices.
Specifically, Enron was involved in underhand dealings by selfishly pursuing economic benefits in the short term while concealing debts, evading regulatory rules, and use of political influence were just some of the practices employed by the company. On the other hand, the accounting malpractices of WorldCom comprised inflating assets by about $ 12 billion, costing both workers and investors (Rogalski & Lin, 2003). It was these scandals as well as unethical accounting practices that prompted the United States government to enact laws that aim to curb the occurrence of such behavior in the future. These laws were contained in the Sarbanes – Oxley Act.
The impact of the Sarbanes-Oxley Act
The Sarbanes-Oxley Act or SOX Act wanted to achieve is to have all companies adhere to accounting standards when preparing their financial statements. Mainly, it sought to have companies use the GAAP in reporting their financial statements to shareholders (Weygandt, Kimmel, & Kieso, 2010). To begin with, the Sarbanes-Oxley Act ended the self-regulation of the United States public accounting sector.
In order to achieve this, the Act established an autonomous organization known as the Oversight Board. The authority derives from the power of the Securities Exchange Commission. Specifically, it imposes sanctions upon individual auditors, and companies found to engage in unethical practices.
No doubt, the Sarbanes-Oxley Act has achieved this in the United States in various ways. First, all business leaders in the country have been certifying that they actually reviewed the financial statements of their organizations and that, to the best understanding, the statements reflect the financial position of their organizations. In addition, they have been certifying that they are wholly responsible for the internal financial controls of their organizations. This has enhanced the observance of the financial reporting standards in the country (Rogalski & Lin, 2003). In fact, since the 2002 Enron and WorldCom case, there has not been any major scandal in the country.
References
Rogalski, S., & Lin, F. (2003). The Impact of the Sarbanes-Oxley Act on Financial Reporting & 360-Degree Insight (Press Release). Web.
Weygandt, J., Kimmel, P., & Kieso, D. (2010). Financial accounting: IFRS. Hoboken, N.J.: John Wiley & Sons.