In accounting, unethical behaviors refer to behaviors that do not comply with applicable laws and regulations of accounting practices. Accounting aids managers in their effort to improve the economic performance of the company. Unfortunately, some managers have overemphasized the economic dimensions and have engaged in unethical and illegal actions. Over the past few years, unethical practices have led to several bankruptcies. This article provides a brief analysis of unethical behaviors in accounting practices.
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Situations that might lead to unethical practices and behavior in accounting
Accountants who demonstrate unethical behavior do not abide by the laws and regulations of accounting practices. An article by Oseni Abubakar (2001, p. 3) identified various situations that might lead to unethical behavior in accounting. These situations may include misuse of funds, securities fraud, exaggeration of the value of company assets, and intentional provision of incorrect information in regards to assets and liabilities of a firm.
Other situation that might lead to unethical behavior in accounting includes exploitation of financial markets, bribery, greed, and failure to perform a detailed analysis when preparing financial reports. In his article, Oseni Abubakar (2001, p. 4) argues that most accountants in profit-making institutions often indulge in unethical practices for personal gain. Oseni (2001, p. 4) also acknowledges that Unethical actions can have adverse consequences far beyond the institutions that commit them.
Different companies in the United States have demonstrated unethical behavior in their financial practices. A good example of a company that demonstrated unethical practices was Enron, in 2002. Enron was brought down by the unethical practices of its top executives. Different studies show that Enron Company was involved in one of the biggest scandals in accounting history, which saw its top executives come under fire because of misleading accounting practices that lead to overstated profits.
The effect of the Sarbanes-Oxley Act of 2002 on financial statements
After the Enron blowup in 2002, Congress passed the Sarbanes-Oxley Act, which required companies to improve their internal auditing standards. The Sarbanes-Oxley Act also required financial officers to certify that their financial statements were properly prepared by professional accountants.
Several types of research document an increase in public firms’ accounting and audit costs since the enactment of the Sarbanes-Oxley Act in 2002. In the United States, an analysis of the financial statements of 1,000 firms indicates that there was a 2.3 million average increase in fees associated with Sarbanes-Oxley costs from 2002 to 2004. Abubakar (2001, p. 7) found that Sarbanes-Oxley costs increased in assets, assets growth, the effectiveness of internal control, and 2003 and 2004 audit fees.
Since its enactment in 2002, many firms, particularly small firms, have reported accurate financial statements. Different studies indicate that Sarbanes-Oxley has been beneficial to small firms since their limited personnel, as well as their limited exposure to public scrutiny, make their financial statements prone to inaccuracies.
The sarbanes-Oxley act also lead to the incorporation of audit committees of independent directors in all firms listed in national stock. Although audit committees had been required long before the enactment Sarbanes-Oxley Act, the composition and duties of these independent committees had been mostly unregulated. The inclusion of an independent audit committee has enabled executives to prevent and detect fraud in their financial statements.
Oseni, A. (2011). Unethical behavior by professional accountants in an organization. Research journals of finance and Accounting, 2(2), 3-15. Web.