Corrupt Practices by Accountants - Paper Example

Corruption has become a serious issue in business and professions. Over the last decades, accountants have been the center of major corporate scandals. Accountants perpetuate corruption by producing falsified and misleading financial statements, issuing audit reports that do not reflect the fair and true financial state of an entity. A year to its collapse, Enron Corporation used creative accounting and reported growth in earnings and profitability yet the company was making losses (Jones 25). It did not include billions of debt in its balance sheet to create an impression that it was financially stable. The external auditor failed to report these issues as its independence had been compromised by Enrons executives (Jones 25). The accounting profession has come under scrutiny following the corporate scandals. Accountants should participate actively in reducing corporate corruption since it is a threat to the profession. Additional regulation is necessary to cover the existing gaps.

Arguments for Accountants Increased Role in Fighting Corporate Corruption

The Sarbanes-Oxley Act of 2002 was enacted to improve the quality of financial reporting, enhancing the independence of auditors and increasing accountability within the accounting profession. However, more than ten years since it came to force, accounting scandals are still happening both in the US and other countries. In 2016, Logitech International agreed to pay a $7.5 million penalty after SEC charged it of inflating its earnings for the fiscal year 2011 ("SEC.Gov | SEC Announces Financial Fraud Cases"). Several audit firms such as Deloitte, Ernst & Young, among other businesses have also been charged with violating regulations. The US Foreign Corrupt Practices Act also prohibits US persons and their affiliates from paying bribes to foreign officials to secure contract both within and outside the country. Accountants in organizations manipulate financial statements for several reasons. They sometimes collude with the management of an organization to prepare exaggerated financial statements. For instance, earnings management is a strategy used to report a steady growth of earnings despite a fall in earnings. This is to mislead investors and prevent a fall in the stocks market price when profits fall. In other cases, accountants and the company executives defraud the investors. External auditors also fail to include such corrupt and fraudulent activities in their audit reports.

The internal accounting staff is responsible for preparing the financial reports of a company. Thus, they are critical players in curbing corruption in the accounting profession. Fraudulent directors of companies and other organizations collude with the accounting staff to prepare misleading statements. The accountants are bribed and share the fruits of corruption by the executives. Professional standards require accountants to be honest and ethical in the course of their duties. Internal accounting staff can help reduce corruption by adhering to professional ethical standards. In publicly listed companies, corporate governance principles are implemented to improve the quality of financial reporting and reduce accounting fraud and corruption. Listed corporations are required by SEC and other regulatory bodies to establish a competent board of director, including the independent audit committee. The audit committee of the board oversees the financial reporting process thus ensuring the financial reports of the entity show the true and fair view of the affairs of the entity. The Sox Act also protects whistleblowers to encourage people to report fraud and corruption cases. Besides, the regulations specify that the management has the responsibility for the accuracy of financial reports and detection and prevention of fraud. If there is corruption or fraudulent activities in an organization, the executives will be criminally liable. Stakeholders can also sue the management for the losses resulting from such corrupt and fraudulent practices.

Auditors should also play an active role in detecting, preventing and reporting corporate corruption. The auditor owes the shareholders a duty to care since they rely on the financial statements. Corporate corruption affects the companys financial statements hence auditors should organize their work to include detection of corruption and fraud (Johnston 97-101). This enhances transparency in the accounting profession (Johnston 97-101).

Arguments against Accountants Increased Role in Fighting Corporate Corruption

Auditors have the duty of reviewing the financial statements of an entity and providing a report on whether they reflect the true and fair view of the firms financial status. Auditing is all about collecting evidence and writing a report based on the evidence collected. Auditing standards further require auditors to plan their audit to reasonable detect fraud or material misstatements in the entitys financial statements. They should review and evaluate any evidence of misappropriation of assets and financial reporting fraud. These are the types of frauds that have a significant impact on the financial statements. However, auditing corruption would be a big challenge to auditors since most corrupt dealings are off-the-record and are difficult to identify (Kassem and Higson 1-10). Even with the suspicion of corruption or fraud, the auditor cannot do much without physical evidence. Increasing the scope of an auditors work to include detecting corruption would increase auditor liability and deviate from the primary objective of auditing.

Opponents of increased scope argue that the sector already has too much regulation. They postulate that corporate fraud can be reduced by complying with the current regulations. With strong corporate governance structures, organizations minimize the possibility of corporate fraud and corruption. It is the companys executives and relevant regulatory bodies that have a duty to ensure the existing laws are adhered to.

Conclusion

We have already seen several corporate scandals involving accountants. Accountants should play a critical role in fighting corporate corruption. Corporate corruption affects an entitys financial status although most corruption transactions are not recorded. Establishing effective governance structures would help reduce corruption in the accounting profession by protecting accountants, including the internal staff, from interference by the company executives. Auditors should plan their audits to help identify and report any corruption cases involving the entities. However, this will require additional guidelines and standards from the accounting bodies. The general public expects auditors to identify and report fraud and corruption. Currently, auditors are required to focus on misappropriation of assets and financial reporting fraud, while other types of fraud and corruption affect the financial statements. Regulations introduced after the collapse of Enron and corporate failures have improved transparency in financial reporting but more needs to be done. However, corporate corruption and the involvement of accountants is not only a matter of gaps in regulations but also a question of morality. Although professional ethical standards require accountants, to be honest, this is not always the case. Some accountants get involved in corruption due to the potential benefits. Eliminating corruption in accountancy would require changes in morals. Besides, the additional changes should be evaluated carefully to avoid adverse effects such as increased cost of accounting, increased auditor liability, among other impacts.

Works cited

Jones, Michael J. Creative Accounting, Fraud and International Accounting Scandals. Hoboken,

N.J.: Wiley, 2013. Print.

Johnston, Michael. "Making Transparency Real? Accounting and Popular Participation In

Corruption Control." Critical Perspectives on Accounting 28 (2015): 97-101. Web.

Kassem, Rasha, and Andrew W. Higson. "External Auditors and Corporate Corruption:

Implications for External Audit Regulators." Current Issues in Auditing 10.1 (2016): 1-10. Web.

"SEC.Gov | SEC Announces Financial Fraud Cases." Sec.gov. N.p., 2016. Web. 11 Feb. 2018.