EthicsinAccounting Assessing the Role of Ethicsin, and the Impact of Recent Issues on, the Practice of Accounting:
An Analysis of Unethical and Illegal Practices Leading to the Downfall of Corporations and Companies
By:
October 12, 2016
BAF3M
Unit 19 & 20 (Accounting Careers and Ethics)
Mrs. Hruska
An Analysis of Unethical and Illegal Practices Leading to the Downfall of Corporations and Companies
The two main jobs of an accountant are to classify and record financial information and to provide useful financial information to assist in decision-making. This information is used by people around the world to make decisions that affect both the company the accountant works for and the person that makes the decisions in the first place. Through the accounting system, it is possible for an accountant or company to purposely change or fake information which could lead to a profit for the company. This practice is both illegal and unethical. In the past 20 years, numerous corporations and companies have been caught by auditors, almost always leading to the bankruptcy of said corporation/company. I will analyze the actions of ENRON, Adelphia Communications, andWorldCom that, in the end, caused significant losses or bankruptcy. Finally, I will discuss possible solutions for these problems, small steps businesses can take to avoid repeating the mistakes of the past.
Enron was an American energy company founded in 1985. It was one of the biggest energy companies ever, claiming to have over 100 billion dollars of revenue. In 2001 it filed for bankruptcy. What went wrong? Well it turns out that Enron was actually hiding billions of dollars in debt in off-the-balance-sheet accounts, accounts that don’t need to be shown on the balance sheet. The executives at Enron “cooked the books”, using loopholes in accounting and poor financial records which eventually lead to the public noticing. In 5 months Enron’s stock fell from $90 to $1 and soon after Enron was bankrupt. This caused thousands of people their jobs. The government learned from this and new laws were put in place to make a second Enron scandal more difficult.
Adelphia Communications was a cable television company in Pennsylvania. Founded by JohnRigasin 1952, it quickly became the fifth largest cable company in all of the United States.OvertimeRigas’ family started other businesses such as the Family-Owned farm, an interior design shop, and a private car dealership. In 2002, JohnRigaswas sentenced to 15 yearsinjail at the age of 78 for multiple accounts of fraud including violation of the RICO act, waste of corporate assets, breach of contract, conversion of corporate assets, among others. Soon after, Adelphia went bankrupt.Rigastransferred 2.3 billion dollars in funds from the company to himself. These were made through journal entries that gave Adelphia more debt and theRigasesmillions of dollars of cash or other assets at no cost at all. By manipulating the books to meet expectations of auditors, analysts and investors he was also able to inflate the stock price or the company. Revenues from Adelphia were taken from the company and used for the family’s personal expenses.Rigasalso used the previously mentioned other companies to make fake transactions to his smaller companies that would then go directly to his personal account. For example,Rigasused his car dealership to “lease” vehicles to Adelphia atan inflated price; most of the time Adelphia wouldn’t even receive the vehicles. On a balance sheet or incomestatement,the transaction would lookfine, perfectly legal and ethical. However, this transactionwas justa method to transfer money from the company to theRigasfamily and avoid detection from auditors. Even after all this,Rigasstill wanted more money so he would journalizetransactions with fake companies. Thereby keeping the accounts in balance; taking the money going to the fake companies for himself.
During the 1980’s, when the telecommunications industry was rising, WorldCom was founded and the corporation steadily increased in size, mainly because of the demand. However, in 2000, WorldCom (and its stock) suffered great losses when its proposed merger with Sprint was denied. To stop further losses CEO Bernard Ebbers decided to “enhance the truth” and increase WorldCom’s revenue so that the stock wouldn’t go down.He inflated the revenues by adding bogus accounting entries so that it would look like the company is making ginormous profits.Another way Ebbers achieved his goal would be booking standard expenses as capital expenditures (allowing them to essentially be treated as small expenses over time). It is expected that this quickly accumulated to 11 billion dollars in inflated assets. After being found out, Ebbers was sentenced to 25 years in jail for fraud, conspiracy, and filing false documents. 30 000 jobs were lost and a total of $180 billion was lost from investors.
Following theabovescandals, congress passed the Sarbanes-Oxley act, (a.k.a.Corporate and Auditing Accountability and Responsibility Act)introducing theexpanded set of laws governing accounting and the associated proper procedures while also adding a criminal penalty making it much easier to prosecute people in cases such as the ones previously discussed.This has also indirectly affected the accounting curriculum. An accounting student may find that they need to write essays like the one you are currently reading on ethical practice in accounting in an effort to prevent future accounting scandals by educating students about the topic.
Finally,it is important for a modern-day business to be aware of ways to avoid accounting fraud; as well as accounting students and accountants so that they don’t (knowingly or accidently) cause their company to go down in history as the next WorldCom. Firstly, a company should hire unbiased experts to review their records (like certified fraud examiners).Secondly, companies should have ananonymous reporting mechanismto report employee fraud. Lastly, it is imperative to follow internal control procedures and have a strong control system.A separation of duties allows accountants to essentially check each other’s work, making it difficult for any errors to be missed and fraud would be found quickly.
Sources:
“The Worst Accounting Scandal of All Time.”Accounting-Degree.org,http://www.accounting-degree.org/scandals/.
Investopedia.”Enron Scandal: The Fall of a Wall Street Darling.”Investopedia, July 2016,http://www.investopedia.com/updates/enron-scandal-summary/.
Nisen, Max. “Watching For Fraud Red Flags Can Seriously Boost Portfolio Returns.” Business Insider, Business Insider,Inc, 2013,http://www.businessinsider.com/corporate-fraud-red-flags-2013-6.
Cfo.”Adelphia,RigasFamily Settle Fraud Case -.”CFO, 2005,http://ww2.cfo.com/accounting-tax/2005/04/adelphia-rigas-family-settle-fraud-case/.
Tran, Mark.”WorldCom Accounting Scandal.”The Guardian, Guardian News and Media, Sept. 2002,https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2.
CGMA, Stephen Reed CPA PSA.”Six Strategies for Fraud Prevention in Your Business.”Six Strategies for Fraud Prevention in Your Business,http://www.cgteam.com/blog/six-strategies-for-fraud-prevention-in-your-business.
