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Ethical Behavior in Accounting

The Accountant Your Company Needs

BY TANNER LUSK

The Fall of a Giant In the beginning of 2001, Enron Corp. was a

world leader in energy trading, excelling in both

the natural gas and electricity industries.

However, in just one year this giant of a

company fell completely apart. What caused

Enron Corp., a company that, in its prime, “was

executing on-line trades worth about $2.5 billion

a day”1, to “... being deemed a byword for

corruption and mismanagement”2?

The source of Enron’s downfall is found in

unethical behavior in top-management,

including Arthur Anderson LLP, the main

accountant of Enron3. During 2001, reports of

scandal, false statements of revenue, and

shredded audit reports arose, prompting federal

investigation4. In 2002 in a federal court,

Anderson was convicted of obstruction of

justice, and Enron was left in shambles5. The

once mighty leader in their industry, Enron

became worthless. Failure did not come about

from the performance of the company, but from

unethical decisions made with the intent of

building value for Enron Corp., which resulted

ultimately in Enron’s demise.

While the law has adapted itself against such

events for more than 15 years now, questions

like “Who will be the next Enron?” or “How do

I avoid being the next Enron?” should be on the

minds of top-management for companies around

the United States. Sooner or later, justice does

come to those who embrace unethical and illegal

behavior.

Ethics and You In the world of accounting, ethics are not only a

moral obligation to one’s personal self, but

essential to produce correct growth for a

business. With today’s increasing rate of

technology and capabilities of competitors in the

world of business, companies are faced with

more and more non-ethical practices in their

field, because they are designed to give a more

competitive angle in their respective industries.

These non-ethical practices fall directly upon

accountants, who safeguard information and

report on the health of the company.

In this article, I analyze the differences between

financial and managerial accounting in regards

to implementation of ethical behavior, where the

problem of unethical behavior comes into play,

and why I believe that implementing a more

rigorous ethics training early and often will help

minimize the risk of company termination due to

unethical behavior.

Financial vs Managerial

Accounting Financial and managerial accounting differ

largely in what they observe, and what purposes

they accomplish for businesses. However, both

financial and managerial accounting are

essential in maintaining a healthy company, so

many accounts receive training and education in

both areas.

Financial accounting deals with the status of the

company specifically in the past. Tax audits,

income statements, balance sheets, and other

terms that people associate with accountants

refer to financial accounting. To some, it may

seem like financial accounting may be a

glorified “book-keeper” that records every single

business transaction and acquisition, which is

essential. As one of my accounting professors

put it, financial accounting is not there to answer

questions, but rather to identify which questions

to ask.

On the other hand, managerial accounting, seeks

to answer those questions, particularly questions

which pertaining to optimizing the company’s

performance. Rightly put, “While investors rely

on financial accounts over periods of time for

2 performance determination, mangers need

information from managerial accounting for

decision making in an almost continuous and

more frequent basis.”6

Ethical Dilemmas Over the years, financial accounting has become

more heavily scrutinized and ordered than

managerial accounting. To give an audit, it must

comply with GAAP -Generally Accepted

Accounting Principles- to be recognized as

official and credible.7 The work of financial

accounting has become standardized, in that the

information to be provided on the final balance

sheet and income statement are generally the

same amongst all businesses.

Because of this standardization, financial

accounting has a simple, albeit tedious, job of

maintaining ethical performance. We can say

that transparency is the objective of financial

accounting in producing information that is vital

to the company. Failure to comply with the

GAAP can quickly draw negative attention to

the audit, and have a big impact on the

credibility of an audit.

In comparison, managerial accounting allows

more room to breathe, and management

decisions vary from business to business, as

each business develops its own strategy for

competing in an industry. Managerial

accounting does not need to be in accordance

with GAAP standards, but rather the Institute of

Management Accountants describes four areas

for consideration8. These areas are the

following:

• Competence

• Confidentiality

• Integrity

• Credibility9

Although crucial, these again are merely

guidelines, and not standardized like GAAP.

Pressures in Managerial

Accounting Because of the less scrupulous procedures,

managerial accountants are faced with an

increased number of moral dilemmas, as the

possibility to falsify information is more present,

not only to those within but also without an

organization.

In 2012, the American Institute of Certified

Public Accounting conducted a survey with

more than 2,000 individuals in regards to

business ethics found that “pressure to

compromise organizational standards of ethical

conduct had increased significantly.… “10

Pressure from cybersecurity threats are also

posing ethical dilemmas for managerial

accounting, both in avoiding and implementing

them.11 Methods, such as phishing, wailing, or

spear-phishing allow hackers to gain access to

critical information if those methods are

disguised well enough.12

Figure. Government and Industry accounting perceived as less ethical.13

3 The figure below explains where the possibility

of unethical behavior is most perceived.

Conducted by the American Accounting

Association, various Certified Public

Accountants (CPA) were asked a series of

questions to rate ethical norms about their

employers.14 The ratings were significantly

lower among industry and government

accounting, with ethics training being the

biggest determinant in the CPA’s overall view of

the ethical environment in which they were

associated.

Ethics Training For public accounting and the Big Four Firms,

being a credible source is everything. Because

they receive their income strictly from

performing accounting, not being a credible

source would not seriously hurt the company, as

they would have a very low clientele base.

Ethics training helps to remind employees both

of their own moral obligation as accountants as

well as the dependency of the company on being

a reliable source of both financial and

managerial accounting.

Ethics training is especially important in both

private and government businesses, where

accounting is but one piece of the company.

With today’s fast pace of competition to

generate more revenue and own larger shares of

the market, ethical training should be utilized

throughout the life of the company, as the

challenges and the temptation to be unethical are

increasing every day from both pressure and

technological innovations.

Ethics training should also be utilized at an early

age, as it has been observed “…that ethics

intervention in the accounting curriculum

significantly affects the moral development of

undergraduate and graduate accounting

students….”15

In conclusion, I submit that there is an increased

need for credibility and integrity in the world of

business today. One needs courage to report

ethical behavior, which falls upon accountants as

well as those who also focus on the big picture

to identify where ethics are lacking. We have

learned a lot from companies like Enron Corp.,

and my hope would be that they will always

serve as a reminder to never compromise one’s

own integrity for the sake of getting gain. In, the

end, justice will come to everyone.

References 1. Christopher O’Leary, “Enron—What

Happened?: Year In Review 2002,”

https://www.britannica.com/topic/Enro

n-What-Happened-1517868, accessed

April 2017

2. Ibid

3. Ibid

4. Ibid

5. Ibid

6. Ghose, K.S. 2015, "Ethics in Managerial

Accounting: Today's Challenges in

USA", GSTF Journal of Law and Social

Sciences (JLSS), vol. 4, no. 2, pp. 85-87.

Accessed April 2017.

7. Ibid

8. Ibid

9. Ibid

10. Ibid

11. Ibid

12. Ference, SB 2017, ‘The armor of

awareness’, Journal of Accountancy,

223, 3, pp. 1-3, Business Source

Premier, EBSCOhost, accessed April

2017.

“Our findings may reflect the increased

emphasis, particularly by Big Four firms, on

ethics training and ethical behavior that has

occurred since the scandals of the early 2000s,

which resulted in the demise of Arthur

Andersen.”16

4

13. Michael Cohn, “Industry accounting

perceived as less ethical by CPAs,”

https://www.accountingtoday.com/ne

ws/industry-accounting-perceived-as-

less-ethical-by-cpas, accessed March

2017.

14. Ibid

15. Buell, E.K. 2009, The relationship of

ethics education to the moral

development of accounting students,

Nova Southeastern University. Accessed

April 2017.

16. Michael Cohn, “Industry accounting

perceived as less ethical by CPAs”.