Creative Accounting and Fraud: A Violation of Ethical Principles

There are numerous books, references and guidelines that are available that provide detailed accounting standards. Yet, especially over the past few years, these same standards were neglected or deliberately misapplied for personal gain. There had been a number of high profile cases that involved fraudulent financial reporting. At the top of the list were Enron and Worldcom which were racking up losses but were able to cover it up and even reported earnings. Merck recorded billions of payments which it never collected.

For several years, Xerox improperly distorted accounting rules to boost its profits which were falsely reported at over a billion dollars. These big-scale accounting frauds were not the exclusive domain of US companies. Italy’s 8th largest company included non-existent bank accounts on its books which allegedly ciontained billions in deposits (Badawi 13 & 15). The motivation behind the corporate practice of creative accounting varies from concealment of poor performance to raise stock value, for personal gain in terms of bonus pay-outs, to increase worth to get loans.

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For corporate accountants, it could be due to internal and external pressures to meet expectations or in deference to other business relationships such as a consultancy retainership with the client under audit which is essentially a conflict of interest, or simply a personal lack of character to stand up for honor, integrity and truth. A manipulation of the actual figures and financial status is nothing but fraud. Regardless of how much it is rationalized, it is tantamount to lying and this type of dishonesty for personal gain runs contrary to any known ethical principle.

Such behavior has greatly undermined the reputation of the accounting profession for having seemingly lost its ethical standards. According to Cottell, Jr. & Perlin, there are two dominant ethical systems. One is Utilitarianism which “looks to consequences of acts for moral justification”. Actions are guided by decisions which weighed the good against bad results. The other is Deontologism from the Greek word deon meaning duty. The focus is not on consequence but on whether the act itself is correct or not.

It works under the assumption that “there are duties, rules and principles that are inherently valuable and should never be violated” (3-4). Inasmuch as different individuals will react differently to the same situation depending on which ethical system is personally more dominant, organizations for accountants and auditors had adapted a code of ethics way back in the 1980s to serve as a guide for appropriate professional behavior.

In the academe, ethics instructions had already been integrated into the curriculum through situational cases, simulated techniques and interviews. In the corporate setting, a top down approach is being employed to promote and establish a code of conduct that includes integrity and responsibility. However, having a list of ethical principles to follow is merely the ground work for a foundation. In the wake of the financial reporting scandals, there were calls for reform and in 2002, the U. S. Sorbones-Oxley Act was passed as law.

The Act created a necessary oversight board to look into audits. It can establish controls, investigate probable violations and sanction the guilty party. The senior managers were made liable to for any financial disclosure by the company and must certify this. Disagreement between the auditors and management was required to be included in the report. Moreover, this does not only apply to U. S. companies but even the non-U. S. firms with trading in the U. S. This paved the way for further enactment of compliance practices on a global scale.

Ethical principles allow accounting professionals to develop a strong character that will put honor and integrity back into the profession and once more raise investor confidence. To reinforce it, management support, corporate governance and oversight by regulatory bodies are required for the individual to successfully adhere to these principles. Works Cited Badawi, Ibrahim M. “Global Corporate Accounting Frauds and Action for Reforms. ” Review of Business 26. 2 (2005): 8+ Cottell Jr, P. G. and T. M. Perlin. Accounting Ethics: A Practical Guide for Professionals. Westport, CT: Quorum Books, 1992.