Business ethics is vital for the success of any organization and well-being of society. In many instances, enterprises are faced with challenges of upholding business ethics. Due to these challenges in exercising business ethics, this research paper finds it imperative to investigate the issue of unethical accounting practices. In identifying these issues, the theory of planned behavior will be utilized. With this theory, one can predict the motives of the directors and managers of the firms, involved in unethical accounting practices. Moreover, case studies of the companies that have been previously accused of unethical accounting practices will be used. The research uses them as an attempt to explore the avenues used in undertaking unethical practices in organizations. The research will also include previous experiences and their relation to the ethical issue. Finally, this paper aims at giving recommendations that might help institutions in reducing unethical accounting practices and proving that accountants are to blame for unethical accounting practices in institutions.
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Business Ethics: Unethical Accounting Practices
It is the responsibility of institutions to practice ethics in their operations. Many businesses experience challenges in accomplishing this task. In previous years, many cases of the breach of business ethics have been reported. For this research, the area of interest is unethical accounting practices. All over the globe, organizations have had the urge of accumulating more and more wealth even through dubious means. The used shortcuts benefit the companies, but they are unacceptable in society. Therefore, it is necessary to exercise business ethics in all organizational practices. In this case, ethics is an everyday practice that involves the use of ethical principles. The latter give guidelines to institutions on how they should conduct their business. Through business ethics, the management of companies is able to examine the morality of their operations, which also enables the scrutiny of international business practices that are faced with ethical issues due to cross-cultural settings.
Similarly, the accounting profession requires organizations to perform their accounting work ethically and with integrity. In this case, ethics includes the keeping of proper records and accounting for all activities through having correct books. However, some organizations have been faced with unethical accounting practices over the years. Some of these companies include Enron Company, Toshiba, Tyco International, and Tesco. Thus, state companies were reported with unethical accounting practices. Such issues arise due to various factors such as the pressures of achieving short-term goals and objectives (Gurnani, 2015). This paper will extensively illustrate the unethical accounting practices in modern businesses, and in this case, unethical accounting practices should wholly be blamed on the accountants of their companies.
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Relevance of Ethical Accounting Practices
In business world, accounting is a crucial profession. Through the use of accounting, institutions are able to monitor and control their financial information. Subsequently, the acquired information determines the direction and success of the firm. For instance, shareholders depend on the accounting information for them to invest into a company. Therefore, the accuracy of information illustrated in financial reports is paramount. Moreover, the company’s management depends on the same information to make their decisions. Through the financial books, company managers can determine their profits and losses. Thus, in determining the yields of their organization, they are able to make rational decisions (Amir, Yasir, Shahzad, Ahmed, & Mehmood, 2014). Due to the high dependency of the internal and external parties to accounting information, ethical accounting is highly encouraged.
Unethical accounting is still experienced in many institutions. Despite this profession’s standards requiring accountants to be ethical and intelligent, they still manipulate financial books. The responsible individuals provide fraudulent information and adjusted figures on the financial reports. Such fraudulent information misleads all the dependents of these financial reports. For instance, false profits will attract more investors to the company. Although such an action might benefit the organization, this will lead to the increase in losses to investors. In most cases, the adjustment of figures benefits the accountants themselves. With the need to scam the organization of their funds, they might underestimate the profits and siphon the surplus. In this case, accountants are wholly responsible for the damage and unethical behavior. However, in some instances, they provide fraudulent accounting information under instructions of their management. With such instructions, the funds are used in funding the lifestyles of executive managers. Consequently, these actions greatly disadvantage the organization and its partners. Some of the dubious practices go unnoticed due to the influence of executive managers on the accountants. However, various cases have been unearthed, thus becoming the responsibility of the external auditors. If such instances prevail in an organization, they can lead to its fall (Amir et al., 2014). Due to the increase in unethical accounting practices, it is important to address the issue as it affects many businesses.
Examples of Unethical Accounting Practices
Enron is one of the companies that will be remembered in history for its unethical accounting practices. The business rose at a very fast rate that was hard to believe. The rise of the company attracted more investors, which led to increase in profits. In only 15 years of its operation, the corporation had diversified into over 40 countries. Due to the fast expansion of the business, it had employed over 21,000 people (Steffensmeier, Schwartz, & Roche, 2013). Additionally, it became the US seventh largest company, thus attracting great speculation and admiration. However, scrutiny in the organization revealed that there was a huge ongoing scam. Specifically, it was discovered that Enron Corporation had lied about the profits that were meant to deceive the investors and parties interested in the company. Financial reports from the organization did not reveal debts incurred. Such a lack of revelation of the debts that the firm had accumulated portrayed a deceptive image of the company. However, the discovery of the accounting unprofessionalism involved in the financial reports led to creditors and investors withdrawing their support. Consequently, this resulted in the company’s bankruptcy in December of 2001 (Steffensmeier et al., 2013). Although perpetrators are yet to be brought to justice, the executives of the corporation are suspected to have been involved in fraud and money laundry.
Accounting fraud is mainly influenced by the motives of managers and accountants of the institution. Upon the business reaching its success, many investors bought shares, thereby leading to the profits of the company that was overstated. The company was also involved in the high-risk deals that were never indicated in the financial books. In accounting, the omission of crucial financial details is unethical and it leads to the nullification of an accountant’s certificates. Thus, accountants have the ethical responsibility of indicating the true information of the firm through its financial books.
In Enron’s case, its accountants should be held responsible for the unethical behavior and fall of the organization. The refusal to indicate debts and operations of the company was misleading to both investors and managers of the firm. The discovery of debts led to investors’ loss of confidence in the company. Had Enron’s accountants and auditors held ethical accounting practices, the organization would not have gone to bankruptcy. Additionally, the managers would have made rational decisions concerning the position of the corporation through the use of correct financial information. At the same time, the executives of Enron Corporation are to blame for the losses as well. With external auditors, it is possible to notice unusual operations in the organization. On the contrary, Enron’s managers had never noticed any unusual practices for 15 years, which raised many questions. In addition, an organization cannot enter any business without the knowledge of its executives. For this reason, chief executives of the company should be held responsible (Gurnani, 2015). Responsible executives of any organization should oversee operations of the firm. Therefore, the blame for the failure of the institution lies on the management of the company.
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Another case of unethical accounting practices was observed in Toshiba. In 2015, the company was sued for USD162.3 million over an accounting scandal. According to the investors who had sued the organization, Toshiba practiced inappropriate accounting. In issuing a statement, the company management admitted having given inflated profits dating back to 2008. From the records, it was clear that the company has exercised unethical accounting for the past seven years without any notice of the authorities. Employees of the company also indicated that although they might have suspected the illegitimacy of the management’s actions, they were not in a position to question. The practice cost the company reputation dearly. Firstly, the unethical behavior led to the loss of trust and confidence of Toshiba’s shareholders. The loss of investors means that unethical behavior will lead to a reduction in profits due to the withdrawal of shareholders and other influential parties from the firm. Compensating the investors will also cost the organization, and it will take a long period to win back the confidence of investors. Bilinski, a director of the Center for Financial Analysis and Reporting, attempted to explain the reason behind the unethical accounting practice (Farrel, 2015). In his opinion, pressures to meet short-term market expectations and share prices significantly contribute to unethical practices (Farrel, 2015). Therefore, such practices in companies greatly damage their reputation and position.
At the same time, pressure influences the development of creative methods of achieving goals by the executives. However, this should not be an excuse for any professional accountant to engage in unethical behaviors. Thus, it is a requirement and expectation of accounting standards for these professionals to be intelligent (Farrel, 2015). Their intelligence can help them develop or formulate methods of raising income and meeting market expectations. Such creative methods include selling assets, which can help in meeting their goals and objectives. However, accountants should not allow being manipulated by executives of the firm into using unethical accounting practices (Okoro & Okoye, 2016). For this reason, accountants of the firm should be held responsible for any misleading information appearing in financial reports.
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Throughout the course, I have studied many unethical accounting cases. In the majority of these cases, I noticed that they were deliberate. Due to this, the responsible persons should be held accountable and responsible for their actions. Whenever unethical practices take place, shareholders are the main casualties of fraud. Accountants are responsible for the generation of financial books. From their responses, it is obvious that they can be tempted to manipulate the figures to their benefit or to that of their superiors. Furthermore, the manipulation of financial reports misleads those depending on them, thus leading to incorrect decisions. At the same time, this practice also gives a false position of the firm, for instance, by the overstatement or understatement of its profits. With a false position, it is impossible to make a rational decision as people will depend on financial statements. Similarly, the management of the organization will also make irrational decisions when entering deals that might expose the company to great losses (Gurnani, 2015). Due to the increased cases of unethical accounting practices in business world, it is paramount to develop the measures that can curb this behavior.
Furthermore, some theories can help explain the engagement of responsible parties in fraudulent practices. Thus, the theory of planned behavior can be the best one to explain the situation at hand. According to this theory, it is possible to understand how the managers of institutions violate the generally accepted accounting principles with the aim of meeting targets and annual bonuses. Moreover, it is possible to predict whether managers will practice ethical or unethical behaviors. Since managers take advantage of the organization while making decisions, they can realize their fraudulent intentions.
One of the major unethical accounting practice, found in many businesses, is off-balance sheet financing. Through this method, managers finance their operations where the expenditures are written off and other parties to the organization are not aware of this. Due to such fraudulent operation, the available income and financial statements do not reflect the true position of the firm (Wokukwu, 2015). This practice has grave consequences to both the organization and the economy of the country of its operations. With the understatement of its profits, the company is under-taxed, which leads it to losing its revenue. At the same time, the firm loses funds since some of its expenditures and incomes are not recorded. In this case, money leaves the organization unrecorded. Without recording its outflow, the company does not receive its money back. This practice leads to the increase in unrecorded debt of the firm that might even cause the liquidation of the company (Wokukwu, 2015). For this reason, most managers and internal auditors are always aware of unethical practices in the organization.
The 20th-century crash of the stock market resulted in lack of ethics of managers and executives. Consequently, the absence of ethical practices of these professionals has led to the loss of public confidence that results to massive losses of securities exchange. Not only does the crash of securities exchange hurt a specific company, but it also damages the entire economy of the country and it may even spread globally. With the theory of planned behavior, it is possible to isolate various indicators of fraud such as attitudes, perceived control, and subjective norm (Wokukwu, 2015). If a manager has the above attributes, it is very likely and easier for them to conduct fraud in an institution.
The problem of unethical accounting activities can be prevented through various methods. Firstly, it is important for any business to use external auditors in every financial year or randomly. These professionals are independent of the company, which allows them to conduct their duties independently, thus upholding accounting standards and ethics. With external auditors, the company can identify the weak spots that internal auditors and managers use to siphon the company’s funds. Additionally, the use of independent external auditors helps bring transparency and accountability since these professionals put all actions of the organization into scrutiny. The scrutiny is paramount to the firm as it ensures all activities have been conducted ethically and intelligently (Okoro & Okoye, 2016). Transparency and accountability also improve investors’ confidence in the organization. Therefore, they help boosting ethical accounting practices in the firm.
Another method of combatting unethical practices is reducing the control of managers. Through the reduction of managers’ powers over accounting duties, they will have no influence on internal auditors, which will make the latter more independent. Consequently, ethical accounting practices are upheld. A periodic vetting of managers and internal accountants also contributes to the prevention of unethical accounting practices. If organizational unethical behaviors are curbed or eliminated, the chances of economic sabotage reduce. Vetting can also help identify the productive individuals in the organization. At the same time, the human resource department is in a position of identifying individuals exercising ethical and unethical practices (Okoro & Okoye, 2016). With the process of vetting, HRM can eliminate employees with negative influence in the organization.
Accountants are largely responsible for unethical accounting practices. Enron Corporation is one of the best examples of the destruction of a company by the unethical actions of its accountants and managers. In this organization, debts and highly risky deals were not indicated in financial reports. Such a lack of indication gave misleading information about the position of the organization, which led investors to making irrational decisions and losing their money. The unethical accounting practices also led to the bankruptcy of the company. Toshiba also practiced unethical accounting, which caused its investors lose confidence in the company. The theory of planned behavior can help identify if managers can collaborate with accountants to commit crimes within their institutions. Unethical behaviors can be prevented through the use of external auditors. The process of vetting accountant and managers periodically can also contribute to solving the problem.