Ethics in Accounting: Distinguishing Right from Wrong - Paper Example

Introduction

The major financial scandals that have rocked the accounting world have been a construct of falsehood, a scam, or absence of ethics and morality in accounting practice (Fisher & Sweeney, n.d.). Ethics in accounting concerns a distinction of what is evil from what is right. Every time a professional makes a decision, the two ends of the spectrum are integral, and thus, ethics is an essential component of professional practice. There is a need for accountants to adhere to a strict code that defines the scope of their behavior within the practice, to avoid all the mishaps and financial scandals that happen in the accounting world.

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Issue

The stringent code of ethics that accountants ought to follow came in to place with strict adherence to the various tenets after the financial scandal that rocked Enron Corporation in the early 2000s (Shoaib & Rabeet, 2012). Enron, a decade ago, was one of the biggest financial corporations in the world, with shares in virtually every part of the world. Such was the magnitude of the company that when it filed for bankruptcy in 2001, it led to a world financial crisis, with Wall Street bearing the brunt of it. Before the company filed for bankruptcy, it had made its money from the phony California energy crisis. Executives of the company bribed some officials working in the energy sector of California to engineer a power shutdown in the pretense of carrying out repairs. As a result of the scheme, around 40% of the power production plants were shut down in the State of California. Knowing that power is a necessity, Enron then drove up fuel prices by up to 10 times the average price knowing full well that the company would make a massive profit out of it.

The scandal had a disastrous effect on the lives of people who had invested in the company's stock, and most employees who ended up being let go. About 20,000 employees were fired, and a lot more people lost their savings as the company's stock price fell slowly (Boddy, 2017). The cost accruing from the various scandals that Enron crafted is still being felt up to date. The company messed up the lives of several people both directly and indirectly; people lost lives during the power outage; others lost their jobs and more lost faith in investment schemes. Top executives like Skilling and Lay led people to believe that the company was performing the various tasks as they ought to have, yet in retrospect, it was totally off track.

With regards to the issue of the code of ethics that accountants ought to have followed to mitigate or prevent the collapse of Enron Corporation, following the system would not have resulted in the disastrous effects that came after the intelligent way of doing things. The resulting financial scandal is a testament to the catastrophic impact that failure to adhere to the code of ethics can cause. It is not only detrimental to the company involved but also to the individuals who end up as collateral damage. Thus, the paper will explore how having a code of ethics for the accountants at Enron Corporation could have prevented the financial meltdown then and even in contemporary times.

Literature Review

Accounting is an international profession that lends its services to virtually all companies and enterprises around the world. As such, the professionals working in the accounting field have a myriad of practices and behavior that they ought to follow, which in accounting circles, is the code of ethics that defines the scope of the profession. In early 2018, the International Federation of Accountants (IFAC) came up with a revamped code of ethics that professional accountants ought to follow in the execution of their professional work. Dubbed, the International Code of Ethics for Professional Accountants, it covers the various principles and code of conduct that accountants should adhere to in service delivery regardless of the organization or company that they are working. The code captures some fundamental areas, which include competence, professional behavior, and confidentiality, which are essential to the profession's recognition of the public interest responsibility.

Professional competence denotes an accountant's continuing duty to maintain the tenets of professionalism (Shoaib & Rabeet, 2012). In this regard, an accountant should acquaint themselves with the current practice standards in their profession. Having the updated information and principles of accounting will allow a professional to perform their duties as they ought to. When an accountant has contemporary knowledge and beliefs, they can then deliver commendable work to their client or company that they are working. It is, therefore, important for accounting professionals to be up to date with the appropriate skills and principles in a bid to meet the minimum requirements of the code of accounting where professional conduct is a significant factor. Professional competence and due care are, therefore, pertinent to an accountant's code of practice, especially in the contemporary accounting world where principles and codes of accounting are sensitive to the people and companies that need professional services.

The other relevant code of ethics that accountants need to adhere to is confidentiality. Confidentiality denotes the virtue of keeping professional information secret and secure from prying eyes of individuals who can wreak havoc on a client or a company (Akers & Giacomino, 2011). Whenever an accountant is conducting their professional work for a client, they should never disclose the information or the particulars of the work to members out of the scope of the task. For instance, when an accountant is reviewing the records of a company, they should not disclose the information to parties outside the company. Additionally, when an accountant adheres to the confidentiality standards in line with the code of ethics of accounting, they can maintain a professional relationship with the client, which bodes well for their career. When a client is aware that an accountant is confidential, they will trust the professional to render their services, in this way, creating an excellent reputation for the accountant.

Professional behavior is one of the other pertinent codes of ethics that accountants need to follow in dispensing their services (Shoaib & Rabeet, 2012). It denotes the act of an accountant abiding by the set standards within the scope of their practice. For instance, if the code of ethics indicates that accountants need to greet their clients professionally and maintain etiquette in the delivery of their services, they ought to adhere to the stipulations (Shoaib & Rabeet, 2012). Furthermore, accountants need to comply with the stipulated laws and regulations within the practice as it determines the professionalism that accountants need to showcase in a bid to uphold the ethics of the profession.

Morality is one of the significant concepts in professional accounting and simply put, it means being aware of what is considered right or wrong with regards to the environment, culture or the situation that a person finds themselves in (Jeffrey, 2018). It is a social construct that aims to define what is upright or not. Often, most people define moral behavior or morality as an acceptance of specific rules or constraints that may limit the attainment of one's interests. Still, they encourage the collective good of the people involved (Williams, n.d.). To this end, accounting professionals' practice ethical values like justice, dignity, and prudence in the execution of their roles and responsibilities. Any deviation from the principles of ethics and the view of morality in accounting is considered falsification of reality and abdication from ethics and morality. To this end, accountants have a responsibility to ensure that they are just, prudent, and practice dignity in everything they do. An accountant has a moral duty to ensure that the client or the company they are working for gets just treatment by practicing truthfulness.

Overall, the empirical studies on the code that accountants need to follow reiterate the need for the professionals to have ethical standards that they ought to adhere to in their practice. As captured in the previous paragraphs and the studies conducted over time, the code of ethics that accountants need to adhere to deal with professional conduct, integrity, morality, and confidentiality. These tenets are the backbone of the accounting profession, and thus, professionals in the field need to adhere to them in their practice. Concerning the code of ethics that define accounting, these concepts will provide a pathway for the analysis of Enron Corporation's malpractices. The company's downfall that occasioned the financial crisis of 2001 is essential to the accounting profession as the individuals working in the firm failed to adhere to the code required. Thus, the next section will explore how the failure of the accountants working in the firm led to the financial crisis, and in this way, reiterate the need for adherence to the code of ethics in the accounting profession.

Method

The paper's general question is what code of ethics accountants are required to follow. The specific questions, however, will focus on the case of Enron Corporation: what the accountants in the firm did that led to the financial crisis of 2001.

The research is a meta-analysis that conducts a literature review of the articles on the code of ethics that accountants should follow in their professional work. The literature will focus on the case of Enron Corporation: with regards to what the accountants in the firm did to occasion the financial crisis of 2001.

The reason for conducting a meta-analysis is that it provides an overview of the work done with regards to the code of ethics of accountants. Additionally, performing a literature review of the articles done over time provides a bearing on the practices on the ground. It is, therefore, a quick way of gleaning the concepts relevant to accounting.

Results and Discussion

One of the reasons that led to the financial crisis occasioned by Enron Corporation was the corporate governance of the company's executives (Boddy, 2017). In contemporary terms, corporate governance describes the relationship that stakeholders, a company's Board of directors, and executives have among themselves. Thus, it defines how work goes on in the company among the relevant people who are essential for making the decisions that will determine how the various activities within the company are. To this end, corporate governance has a bearing on the activities of the company, which in the case of Enron Corporation, led to the financial crisis of 2001. As captured in the preceding sections, Enron Corporation's Board of Directors contributed significantly to the events that occasioned the collapse of the company. The Board ought to have overseen the various activities and financial trades undertaken by the executives of the company. However, the Board failed to supervise the implementation of the corporation's code of conduct, thus, enabling the executives to do as they wish.

Directors and shareholders who represent the broader spectrum of a company's interests ought to act with honesty, reasonable care, and competence. Being at the highest level of a company's structure, the Board of directors is instrumental in setting the pace for the company's overall code of conduct. Enron Corporation's Board of directors, however, failed to uphold these standards.