Introduction
The Texas State Board of Public Accountancy was formed with an aim of “protecting the public by ensuring that persons issued certificates as certified public accountants possess the necessary education, skills, and capabilities and that they perform completely in the profession of public accountancy” (Texas State Board of Public Accountancy, 2012a). The board is mandated to “initiate proceedings to determine the eligibility of a person for examination, certification, and registration or licensing. The board may also initiate disciplinary action against a person” (Texas State Board of Public Accountancy, 2012b). The Texas State Board of Public Accountancy is divided into a number of committees that handle various issues. Some of the board committees are the behavioral enforcement committee and technical standard review committee (Texas State Board of Public Accountancy, 2012a). This part of the paper summarizes enforcement actions taken by the board for the year 2011.
Impression of the cases and actions taken by the Texas State Board of Public Accountancy
The Texas State Board of Public Accountancy has a variety of actions on a variety of offenses. These offenses focus on malpractices in accounting and auditing practice. The table below summarizes some of the offenses and actions that were taken by the Board.
Table 1.0 – Examples of offenses and actions taken by the board
Source of data – Texas State Board of Public Accountancy, 2012b
From the sample of offenses and cases shown in table 1.0 above, it is evident that the Texas State Board of Public Accountancy carries out in-depth investigations on the clients’ practices before charging them. Further, from the table above, it’s clear that the Board’s enforcement action revolves around communication from the board, return of original documents that the client provides the Certified Public Accountant, unauthorized practice or use of protected terms, renewal of licenses, and CPE requirements (Texas State Board of Public Accountancy, 2012b). The functions carried out by the Board are quite significant. They ensure that there is proper and adequate control and regulation over the accounting profession. In addition, they minimize the exploitation of the public.
Accounting and Moral Dilemmas
Ethics in accounting
Background of accounting ethics
Ethics can be applied in any profession. Basically, ethics denotes a set of laws or a moral system that provide a basis for discerning whether an action is correct or erroneous (McGraw-Hill Higher Education, 2007). Therefore, members of a profession can come up with ethical principles that guide them when carrying out their duties. Luca Pacioli introduced accounting ethics. The ethics he introduced were further built by the state and other professional groups. For instance, the American Institute of Certified Public Accountants came up with the first five ethical principles which Certified Public Accounts must comply. These ethical principles are independence, integrity, responsibilities and practices, competence and technical standards, responsibilities to clients, responsibilities to colleagues, and other responsibilities and practices (McGraw-Hill Higher Education, 2007).
Transformation of the code of ethics
Ethical principles have gone through a lot of metamorphoses over the years. For instance, Michael Josephson reclassified the ethical principles in ten. In his view, the ethical principles were “honesty, integrity, promise-keeping, fidelity, fairness, caring, respect for others, responsible citizens, the pursuit of excellence, and accountability” (Smith & Smith, 2003). Several other scholars have also attempted to come up with such classification and better analysis of the ethics. In addition, the collapse of several multi-billion corporations, such Enron Company, and the wider range of accounting services, such as auditing, fraud investigation, risk management among others, have created the need for improved ethics and stringent regulations to oversee the accounting profession. These changes in accounting ethical standards are aimed at improving public confidence in the accounting profession (Smith & Smith, 2003). It is inevitable to point out that excellent ethics does not always imply fine business practices. The aim of ethics in business is to guide people conducting business to comply with the code of conduct. They also aim at encouraging the confidence of the entire public and the commodities or services they offer. Considering the significance of the ethical standards, only the certified professional bodies are mandated to formulate or change the existing ethical standards. This exercise is carried out in liaison with the Certified Public Accountants and other interested persons. This acts as good control over the process of formulating and amending the ethical standards (Mintz & Morris, 2011).
How professional bodies improve awareness of code of ethics
The professional bodies have improved awareness of the code of ethics by incorporating them into the syllabus of the professional courses. Ethics are taught as part of the accounting course. The main aim of ethics education is to create a sagacity of moral responsibility of Certified Public Accountants at the earliest time possible before they join the field to practice as accountants (Smith & Smith, 2003). Further, ethics education enables them to have knowledge on how to handle ethical dilemmas that they may face when practicing. Apart from teaching the course in learning institutions, the regulating body also organizes seminars and workshops. In such forums, the body educates the accountants on the code of conduct and other emerging issues. Also, the body gets feedback from the professionals on how to improve the accounting profession. This ensures that there is constant review and improved awareness of the code of ethics (Smith & Smith, 2003).
Benefits of ethics
The accounting profession is vital for the well-being of the economy. It is because accountants play a significant role in the economy. Most importantly, they produce financial reports which are a form of communicating with the stakeholders of the organization about the financial and economic condition of the entity. The stakeholders of the entity especially investors and creditors depend profoundly on the annual statements of the entity (Mintz & Morris, 2011). This enables them to make informed decisions about their association with the company. This creates the need for close monitoring and regulation of the Certified Public Accountants. Ethical standards improve the professional environment. It makes the Certified Public Accountants act in a moral manner when executing their duties. Besides, companies always carry out periodic reviews to very that their employees abide by the ethical principles (Rachels, 2009).
Secondly, ethical standards increase the reputation of the accounting profession. Companies that completely embrace ethical standards have improved reputations. This improves their presence in the market hence increasing returns. Improved reputation also helps in maintaining the financial stability of the organization. This can be observed in stable or improving share prices. Thirdly, ethical standards help companies to instill discipline in employees. The code of ethics can help companies to come up with disciplinary rules. Finally, the use of a code of ethics reduces the number of litigations that a company may have at a given time. It is because the use of ethical principles minimizes the possibility of the company being on the wrong side of the law at a given time. In addition, it minimizes the possibility of a company facing regulatory investigation or sanctions (Rachels, 2009).
Moral dilemmas
Description of moral dilemmas
McGraw-Hill Higher Education (2007) an ethical or a moral dilemma is a “situation in which an individual or group is faced with a decision that tests the code of ethics” (McGraw-Hill Higher Education, 2007). More than often, ethical dilemmas are easy to distinguish and unravel. Just like any other profession, accountants face numerous dilemmas while carrying out their duties. Some of these dilemmas are multifaceted and extremely tricky to unravel such as the Enron and WorldCom scandal (McGraw-Hill Higher Education, 2007). Also, an ethical issue can also be a disagreement with the clients on ways of preparing the books of accounts. Such situations call for an elevated level of ethical behavior for those in the accounting profession. As mentioned above, the codes of ethics are educative and useful. Conversely, the decision to act ethically is personal. This decision cannot be motivated with a reward or catalyzed by punishment for not obeying the code of ethics (McGraw-Hill Higher Education, 2007). Table 1.1 below summarizes the framework for analyzing an ethical issue.
Table 1.1
Source of data – McGraw-Hill Higher Education, 2007
Analysis of moral dilemmas
Chartered Institute of Management Accountants (2012) states the moral dilemmas that accountants face can be related to the essential ethical principles which a professional accountant must uphold, these are integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. The moral dilemmas are not specific. They depend on the case an accountant faces while carrying out duties. The Enron Scandal shall be used to analyze moral dilemmas. In addition, two hypothetical case studies on insolvency and insolvency information are used to discuss moral dilemmas (Chartered Institute of Management Accountants, 2012).
Case study one: A real case study
Moral dilemmas in the Enron Scandal
Enron Company was an American-based energy company. It was the largest supplier of natural gas in America in the early 1990s. The company had a stunning performance in the 1990s. The share prices traded at about 77 times the value of the company. Shareholders and analysts viewed the financial statements of the company as very complex (Stuart & Stuart, 2004). The ethical dilemma in the case is that the top management of the company used the complex nature of the financial statements and the weaknesses in the accounting standards to manipulate the financial records to enrich themselves. This was characterized by manipulating the balance sheet to reflect high performance. Specifically, they inflated the asset values, overstated the reported income and cash flow, and eliminated the liabilities from the financial records. In addition, the top management negotiated dubious investment contracts for the company. These investments incurred losses that were never reported in the books of account of the company (Stuart & Stuart, 2004).
The crime committed by the three top management involved can be categorized into five these are conspiracy, securities fraud, false statement, insider trading, and fraud. Based on the code of ethics, it is clear that the management breached all the ethical principles. The managers involved in the scandal were competent but they did not exercise professional due care and apt professional behavior. In addition, the three managers did not exercise integrity when preparing the financial statements. They also lacked integrity in running the organization. Further, the three managers lacked objectivity. They deviated from the main goal of the business and failed to take into consideration the shareholders’ interests (Stuart & Stuart, 2004).
Impact of the moral hazard
The moral dilemma in the Enron case resulted in a massive loss that had never been experienced in the history of the United States of America at that time. First, shareholders of the company lost about $74billion as a result of the falling share prices in four years. Secondly, Enron’s creditors and energy entities incurred hefty losses. Finally, over 20,000 jobs were lost. The employees also suffered losses resulting from the loss in value of the shares because over 50% of the amounts in the savings plans were used to purchase the company’s shares. The total market failure that resulted from the Enron scandal amounted to over $100billion (Stuart & Stuart, 2004).
Case study two: Hypothetical case study
Possible insolvency
Consider a situation in which “The Chief Financial Officer of a manufacturing company is aware of a situation where the sales manager is unlawfully declaring fuel benefits as the taxable value is soaring” (Chartered Institute of Management Accountants, 2012). This has resulted in higher profits than the true position and if it is declared the margins might go down. This unlawful practice creates a possibility of the company going into insolvency. The insolvency might result in the loss of over 6,000 jobs. Further, the chief financial officer has informed the other directors of the company and they have indicated their reluctance to reveal the wrong tax bill to the public. Besides, he is aware that the law requires him to inform the tax authorities of the unlawful tax bill (Chartered Institute of Management Accountants, 2012). A summary of possible solutions based on the ethical code of conduct and the consequence of the actions is shown in table 1.2 below.
Table 1.2
Source of data – Chartered Institute of Management Accountants, 2012
Case study three: Hypothetical case study
Takeover information
The Chief Financial Officer of a large multinational entity has privy information concerning a takeover bid to take over a rival firm. His friend owns shares in the rival company and would like to sell these shares. He has approached the CFO for advice on the matter. A summary of possible solutions based on the ethical code of conduct and the consequence of the actions is shown in table 1.3 below.
Table 1.3
Source of data – Chartered Institute of Management Accountants, 2012
References
Chartered Institute of Management Accountants. (2012). Ethical dilemmas: What would you do. Web.
McGraw-Hill Higher Education. (2007). Ethics in accounting. Web.
Mintz, S. & Morris, M., (2011). Ethical Obligations and Decision Making in Accounting: Text and Cases. Boston: McGraw-Hill.
Rachels, J. (2009). The Elements of Moral Philosophy. Boston: McGraw-Hill.
Smith, T., & Smith, L. (2003). Business and accounting ethics. Web.
Stuart, I., & Stuart, B. (2004). Ethics in the Post-Enron Age. Mason, Ohio: Thomson- South-Western.
Texas State Board of Public Accountancy. (2012a). General Information. Web.
Texas State Board of Public Accountancy. (2012b). Texas State Board Report. Web.