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Ethics in Accounting

15 Dec 2017Essay Samples

The word “account” is at the root of the words accountable, accountant, and accounting. Common to all these words is the idea of accurate and responsible reporting and/or recording. This paper will regretfully show that while the word “account” certainly carries weight insofar as lending an impression of truth, accuracy, and objectivity, in our society today, the impression is increasingly found to be false. Highlighted and discussed will be the fields which seem to be particularly vulnerable to misleading or outright false financial reporting:

I. The Accounting Field

In general, the subject of Business Ethics within the accounting field has been receiving a lot of attention. One might hope it to be the result of an increased sense of morality among accounting professionals, but it is more likely a result of “auditors who are quaking in their books as a result of escalating liability suits” (The Economist, v337, p16). This one page article in The Economist makes a case for the “joint and several” liability system instead of the proportional liability system which accountants most prefer. The article reasons that if accountants aren’t held fully accountable for damages in the event of a law suit, then they would probably take fewer precautions in their assessments and work, and fraud would become even more prevalent.

Regarding the individual accountant and his or her tendency to participate in unethical practices, the National Association of Accountants conducted a survey on ethics in management accounting to examine whether accountants are tempted by or succumb to unethical financial practices. It found that the degree of pressure which could tempt an accountant to alter financial statements depended on four characteristics: job title and years of experience; working for a publicly held or private company; corporate verses divisional level responsibilities; and impact of professional certification (Management Accounting, p34). It concluded that the accountants with professional certifications felt less pressure, that divisional managers felt more pressure than did corporate managers, and that middle managers felt more pressure than upper or lower managers. Also, it seemed that publicly held companies put more pressure on their accountants that privately held companies.

In another issue of Management Accounting, an article entitled “Ethics and Excellence,” reports that the National Commission on Fraudulent Financial Reporting emphasizes the role of management and directors in setting an ethical tone in operations. The commission seems to be saying that if managerial accountants foster a “heightened awareness of ethical issues” and if they “create a support system for accountants who are confronted with ethical dilemmas” that a framework will exist which will promote higher ethical standards within the accounting field in general.

Overall, it is difficult to enforce ethical behavior and decision making within the accounting field. In the accountant’s reality, financial data that appears to be determined by objective means can, in fact, have been determined by various “subjective” judgement calls and decisions.

In addition to “creative accounting” which can alter the truer more objective reality of a company’s financial actual standing and health, accounting firms have been accused of unethical behavior regarding a practice called “lowballing.” Lowballing is a practice in which accounting firms provide their services to new clients at 4 fees which are below the actual cost of the services rendered. Accounting firms who practice this do so in an attempt to secure the client’s business on a permanent basis (The CPA Journal, p13). Lowballing itself can easily be seen as an unethical practice, but more importantly, it opens a door for potentially more unscrupulous behavior. Accountants who cut costs in order to get a client’s business are obviously more likely to “play up” to the same client in order to keep that client’s business. This positional relationship could result in the accountant’s fear of challenging the client if he or she requests a procedure, practice, or alteration of an unethical nature. It boils down to an issue of independence: lowballing and its consequent positioning in the client-accountant relationship compromise the independence of the accounting firm, and with it, its first priority to truthful and accurate reporting.

II. BUSINESS AND CORPORATE EARNINGS

In the corporate world, billions of dollars are lost annually due to fraud, embezzlement, theft, false insurance claims, and schemes such as bribery and kickbacks.

Various accounting “schemes,” or creative accounting systems, are often used by corporate accountants and can greatly misrepresent the true financial standing of a company.

In a 1998 Forbes article entitled, “Pick a Number, Any Number” (p124), Bernard Condon reports that “One time or restructuring writedowns that make return on equity look good are becoming a major problem for investors.” It’s obvious that without accurate financial information, such as return on equity, investors are at a great disadvantage when it comes to making appropriate decisions.

The Forbes article gives an interesting example of what a company ended up calling “aggressive accounting.” The company was a Connecticut-based food service company called Fine Host Corporation. It went public in 1996 at $12 a share. In early October of 1997, its stock was selling at $42 a share. Analysts who followed the company were positive and enthusiastic about its future.

Two months later, Fine Host informed its investors that its accounting in recent years was “aggressive,” and that very day the stock fell to $10. In the end, Fine Host’s long decline resulted in wiping out more that 75% of its alltime-high price.

Even before going public, Fine Host’s accounting had failed to book expenses properly and had recorded incorrect profits on food-service contracts. The result, of course, was a misrepresentation of its actual earnings. Fine Host was not accused of fraud, but of “simply stretching the accounting rules,” and in this case the stretching was far and wide: they reported $13 million in earnings, which later proved to actually be $18 million in loses.

Another example of using unethical practices in accounting to benefit corporate accounts is to repeat “one time charges.” Condon gives an example of the Kellogg Co. of Battle Creek, Michigan which explains how the cereal maker took an after-tax $126 million share (or 31 cents a share) for “streamlining initiatives in Europe and other parts of the world” according to Kellogg’s spokesman Richard Lovell. However, this was the ninth time in eleven quarters that Kellogg took a charge to streamline its operations. This writer agrees with Condon’s question: “Shouldn’t such expenses be recognized as a business cost reflected in operating earnings?” It seems like basic accounting.

Another accounting tactic which misrepresents the true financial picture of a corporation involves taking enormous writeoffs. Condon reports that the Boeing company uses “program accounting” which makes it estimate future costs of planes and take writedowns if it underestimates. Boeing took charges of $4billion in two quarters, or $2.6 billion in costs because it couldn’t keep up with record orders.

It appears that examples of this nature could go on indefinitely, and according to Condon smaller companies employ even more questionable accounting practices.

In the above examples, one can certainly make a case for unethical accounting decisions and practices. But unfortunately, more often than not, these types of practices are not considered to be illegal.

It is interesting to note, however, that there are people in the business and academic world who are concerned about these types of practices and believe “There is a need to implement internal control systems that are efficient tools in detecting and preventing fraudulent activities as well as analyze the work behavior of auditors with an eye toward promoting auditing ethical issues (Internal Auditor p38).” An article entitled “Of Ethics and Flapdoodles” (Chief Executive, p68) describes Ethics Process Management which is the brainchild of Dr. Timothy Bell and Dr. Lawrence Ponemon. Ethics Process Management is aimed at “productizing” corporate morality, in other words, they seek to have ethical behavior be seen as something that can actually be measured and quantified. These professors believe that trained ethics auditing teams can pinpoint where a company might be having an ethics breakdown and suggest workable solutions.

The issue of what is ethical and what is unethical behavior in corporate accounting is not clear-cut; it is often a subjective issue and not an easily identifiable objective one. And human nature seems to tell us that one’s opinion will probably have a lot to do with what side of the fence he is standing on.

III. THE HEALTH CARE INDUSTRY

It seems Medicare fraud makes nearly everyone angry. It hurts the sick and the individuals who pay into it. Nearly everyone, that is, except the ones who usually benefit financially such as hospitals, doctors, and health care companies. Perhaps this is why Evelyn M. Knoob was considered a hero to many when she “blew the whistle” and exposed a Medicare fraud case against Blue Cross Blue Shield of Illinois. In addition to winning her case, Ms. Knoob received a reward of $29 million, all with the help of her attorney, Ronald Osman (The New York Times, pA14).

Although a 1999 February 10th article in The Wall Street Journal reported that a recent Medicare audit showed a decline in overpayment, most people remain suspicious.

The Medicare system, with all its “red tape” and inefficiency has always been fertile ground for fraudulent and/or misleading accounting practices. One example of just how easy it is to “cheat” in the Health Care System concerns The Eckerd Corporation, a chain of pharmacies 8 in Florida. The Eckerd Corporation was accused by the U.S. Department of Justice and the Florida Attorney General with “filling prescriptions short while charging Medicaid for the full amount when customers did not return to pick up the rest of their Rxs (Drug Topics, p83).” Eckerd denies cheating Medicaid out of more that $11.5 million, though it admits that problems have occurred when prescriptions were only partially filled and customers didn’t return to pick up the remaining portion. Basically, Eckerd blames the overcharges to Medicaid on “technical problems with the computerized system,” a system which it says was developed in part by Medicaid.

The accounting practices within The Health Care Industry are just as vulnerable to unethical practices as in the corporate world. It may make people especially angry because one expects a corporation to be driven by financial gain, but people want to believe that health professionals (be they pharmacists, doctors, or HMOs) are driven by care and the desire to heal and help the sick.

Unfortunately, The Health Care Industry is a business first, and is also mainly driven by financial gain. And where there is potential for financial gain, there is potential for unethical business and accounting practices.

IV. INDIVIDUAL TAX FRAUD

Individually, each American who works and earns income is required to file a tax return each year to account for the dollar amount he or she earned during that year. In April of 1995, Money Magazine reported that there were $150 billion tax cheats (including corporate and individual), and that they cost each of us $1,932 in taxes each year (p.118). The author of the article, Teresa Tritch says that approximately 117 million American citizens voluntarily turn over roughly $555 billion to the IRS. Signing their individual tax forms, each one is declaring that the tax return is true, correct, and complete. But Tritch says that about one out of twelve who file and sign this declaration are lying, and that another 7 million or so won’t even file a return at all. She claims there is an epidemic of tax cheating in our country.

Again, where one draws the line to determine what’s unethical and what isn’t, and even at times what is illegal and what isn’t, is not always clear and simple.

Low income families are probably not viewed as being as unethical if they can get away with not claiming money earned from “extra week-end” work for example. But in the case of a welfare recipient in Virginia, who was found with food stamps in her wallet and nearly $85,000 in the trunk of her car (Jet, p33), most people would judge her as not only as an unethical person, but also as a criminal. The woman, who was stopped for a routine traffic violation, said she had earned the money from making and selling handbags, but as suspected, she had not paid taxes on the sales. These kind of “practices” are generally impossible for the IRS to uncover.

Individuals who earn large sums of money, in relation to the masses, and cheat are generally judged more harshly. In the case of German concert promoter (who promoted such famous tenors as Luciano Pavarotti and Placido Domingo), Matthias Hoffman was found guilty of not paying 10 nearly $15.5 million in taxes and sentenced to over five years in prison. In this case, an unethical practice was also clearly illegal.

The individual’s responsibility of accounting for personal earnings seems to be just as fraught with ethical decisions as that of any other institution.

V. SUMMARY

In summary, it seems clear that the issue of Ethics in Accounting is not a simple one at all. Accounting firms, corporations, small and large businesses, doctors, lawyers, and “Indian chiefs” (perhaps symbolic here of the household bread winners) all encounter moments and instances when they must decide what is the “right thing to do.”

Near countless laws try to make these decisions easier for those tempted to falsify, hide, or otherwise use various creative accounting tactics (representing “sneaky” but not outright illegal) in an attempt to paint an inaccurate financial picture, be it on an individuals person tax return, or in General Motors Annual Report.

In spite of all the opportunities for unethical behavior in accounting, it certainly seems possible for better and more clearly defined objective laws and rules to be introduced (especially in the corporate world) which could take some of the guess work out of “Is it fraud, or is it just the way they do their accounting?”

It can easily get complicated though, because not everything can be pulled down into a clear rule, law, or policy of procedure. This means that the process of accounting itself will always have an inherent gray zone within it. A zone where each accountant, company manager, 11 individual, etc. will have to choose for himself what is ethical and what isn’t, and what he can, in his conscience, live with, and what he cannot.

WORKS CITED

  • Blank, Christine. “Government joins Medicaid Lawsuit.” Drug Topics (Mar. 2, 1998), v142, p83.
  • Condon, Bernard. “Pick a Number, Any Number.” Forbes (Mar. 23, 1998), v161, p124(5).
  • McGinley, Laurie. “Medicare Audit Shows Decline in Overpayment.” The Wall Street Journal (Feb. 10, 1999), pB5(E).
  • Queenan, Joe. “Of Ethics and Flapdoodles.” Chief Executive (Apr. 1996), p68.
  • Sears, Brian P. “Auditing business Ethics.” Internal Auditor (June 1993), v50, p38(3).
  • Tritch, Teresa. “The $150 Billion Tax Cheats.” Money (April 1995), v24, p118(7).
  • Walters, Ralph E. “Ethics and Excellence.” Management Accounting (Jan 1990), v71, p12-13.
  • Warren, Carl S. and Wilkerson, Jack E. “Lowballing – An Independence Issue.” The CPA Journal (Jan. 1998), v58, p13(3). 

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