Unethical Practices In Accounting Profession
Unethical accounting practices occur when a company or an individual accountant does not follow
the rules of generally accepted accounting principles (GAAP) or the rules governing accounting
practices in the country of practice. Examples of not following GAAP include recognizing revenue
before a customer takes physical possession of the inventory, not recognizing the expenses
associated with revenue (revenue expenses) and not writing down bad inventory.
A company can inflate its sales by recording revenue for unsold stock. According to GAAP, a
customer must take physical possession of the goods before revenue can be recorded in the income
statement. The company can still write an invoice to the customer, but it cannot record it as a sale on
its profit and loss statement until the inventory gets to customer.
Similarly, there are rules by GAAP that pertain to expenses. A company that capitalizes expenses
and places them on the balance sheet instead of listing them as an expense is "cooking the books."
The telecommunications giant MCI unethically recorded its revenue and expenses between 1999
and 2002. The now-defunct public auditor, Arthur Andersen, signed off on MCI's financial statements
and committed fraud in the process.
Not writing down bad inventory is a way of understating a company's expenses. Bad inventory is
inventory that can no longer be sold or in working condition. It is unethical to avoid writing down the
expense to inflate net income and thus increase the financial performance of the company.
Other unethical Behaviours In accounting profession are:
1. Providing erroneous information which regards to the expenses incurred by a business.
2. Exaggerating the revenue of a business.
3. Misappropriation or embezzlement of business fund.
4. Providing wrong information to tax authority
5. When the same firm prepares and and also audit the financial statement of that company. This is
very wrong because fraud might not be detected and it won't represent a fair view of the company's
financial statement.
6. Manipulation of financial statement, also known as window dressing in accounting.
7. Using confidential information for person gain, e.g blackmail.
8. Practicing with a fake license.
PENALTIES FOR UNETHICAL PRACTICES
Any of the following penalties can be meted out to any accountant caught doing unethic practices
1. Suspension of license
2. Termination of the right of the accountant to practice
3. Expulsion from membership
4. Fines and perjury charges
5. Jail terms depending on court order.
Another dimension of ethical dilemmas in the business world
exists in the form of accounting compliances and financial
transparency. Accounts and finance-related ethical issues in the
corporate world can prevail both from the employee side as
well as the employer side. To explain, an employee or a group
of employees can commit financial and accounting frauds
against their employers to pursue financial gains. On the other
hand, employers can violate accounting standards and financial
reporting compliances to evade taxes or manipulate their
books.
Forms of Unethical
Accounting Practices
Conflict of interest
In simpler terms, conflict of interest occurs when the private
interests that an individual or a group pursues are in conflict
with their professional responsibilities and obligations. In the
financial context, conflict of interest exists when an individual
tries to gain personal financial gains that are unfair and in
conflict with their professional obligations. For instance, if a full-
time accountant at an organization offers freelancing
accounting services to competitor firms for personal gains, it
will be an act of conflict of interest.
2. Misappropriation of funds
Misappropriation of funds refers to utilizing the company’s
funds illegally for monetary benefits with or without seeking
permission from other stakeholders. For instance, an employer
takes money from company funds for his or her personal use.
However, in the official records, the employer reflects that
amount as supplier payment and raises fake invoices to
validate the misappropriation. It is noteworthy that the
misappropriation or manipulation of finances can either be
done by employees or even employers. Besides, there are
various innumerable instances of C-suite executives being fired
for misappropriation of funds.
3. Tax evasion
Tax evasion refers to providing false information in the form of
fake financial statements to tax authorities in order to evade
the tax liabilities of the company. It is one of the most common
forms of unethical accounting practices that occur all around
the world. In fact, as per statistics, United Stated only has
more than 5000 investigations of tax crimes in the last 3 years.
4. Window dressing
Window dressing in accounting terms is concerned with
presenting falsified information such as an increase in profit
margin in the financial statements before attracting bids for
public investment in the company or luring new
investors/lenders. This is an ethical issue because it can
mislead various stakeholders of the company. Some of the
reasons for window-dressing the financial statements of the
company are mentioned below
To attract more shareholders or investors.
To manifest a company as financially stable.
To reflect a positive image in front of its consumers.
A positive image can also influence the market prices of the
share
Moving ahead, mentioned below are the effective measures
that can be taken by businesses to ensure the elimination of
unethical accounting practices in a workplace
Measures to Avoid Unethical
Accounting Practices
1. Division of accounting duties
In any organization, all accounting duties should not rest with
one or two people as they will otherwise feel empowered to
manipulate the accounts. There should be clear segregation of
accounting duties wherein different people are responsible for
raising invoices, processing payments, and maintaining the
records of financial ratios of the company. The overall
supervision should rest with the chief financial officer to create
a systematic process of handling accounts. The CFO should
promote great transparency in the financial system of the
organization.
2. Verifying financial statements with
business bank accounts
The on-paper financial statements should be cross-checked
with the transactions reflected in the business bank accounts.
Given the convenience of internet banking in contemporary
times, such verification can be done without any hassle or
without investing much time.
3. Regular audits
Key audit areas need to be identified by the top management
and for these areas, auditing should be done on a regular basis
to ensure there are no missing gaps. When there are regular
audits, it will act as a deterrent to those looking to commit
accounting frauds and will also help in identifying financial
manipulations in real-time. Cash, invoices, vendor payments,
and inventory are some of the key audit areas that should be
closely monitored.
4. Stringent internal controls
Well-established and strict internal controls can be of great help
in preventing financial fraud. These internal controls can exist
in the form of limited access to inventory, restricting employees
to access financial information, multi-person authorizations,
automation in accounting practices, and regular review of audit
logs.
For the effective comprehension of the unethical accounting
practices, below given is a meticulously studied case study of
Enron, an energy and commodities service company in the
United States.
