Prof Scofied
Malotaibi
class_10_-_finance__accounting.pptEthical Issues in Accounting and Finance
Ethical issues in accounting
- Conflicting values and conflicts of interest
- Compensation
- Creative accounting practices
- Ethical disclosure
- Different ethical issues for different types of accounting – tax, management, auditing
What is the role of the accountant and the financial manager?
The collapse of Arthur Anderson convinced just about everyone in the financial world that the role of the accountant and the financial manager is something more than that of an economic technician or just another professional.
Richard DeGeorge, 2005
What is the role of the accountant and the financial manager?
What is the difference between the letter of the law and the spirit of the law?
Joined at the Hip
1998 Waste Management/ AA
1998 Cendant/ Ernst & Young
1999 Tyco/ PricewaterhouseCoopers
Throughout 1990s GE/ KPMG
2000 Rite Aid/ KPMG
2000 Microstrategy/ PricewaterhouseCoopers
2001 Enron (Citigroup)/ AA
2002 Global Crossing, Qwest, Haliburton, Peregrine, WorldCom/ AA
2002 Xerox, Peregrine, Computer Associates/ KPMG
2002 PeopleSoft, AOL Time Warner/ Ernst & Young
2002 Adelphia, Merrill Lynch/ Deloitte & Touche
2002 Bristol Myers, Kmart, Lucent/ PricewaterhouseCoopers
2003 HealthSouth/ Ernst & Young
2003 Parmalat/ Deloitte & Touche
2005 Nortel/ Deloitte & Touche
Tony Bishop (2003), President of the
Association of Certified Fraud Examiners
“In the past, fraud was viewed as a rare event that happened to unlucky organizations. Now it is commonly accepted that fraud is taking place at virtually every organization, every business. The only question is how big it is and how we can catch it before it gets out of hand and destroys a company or organization as it has done with some companies recently, such as Enron.”
Misleading Financial Statements
Is It Unethical?
Off-balance-sheet Partnerships
- Used to hide debt and create illusory profits (also tax avoidance techniques)
- aka Special Purpose Entities
- Most Fortune 500 companies use them – Enron had about 850
- Other dubious practices such as Round-trip Transactions (energy and telecommunications sectors)
Is It Unethical?
Dodgy numbers, “bad” accounting, out-and-out fraud
Those that screw up unintentionally
Those that bend and stretch the rules to make them prettier – “the gray area between legitimacy and outright fraud” (former SEC chair)
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Deceptive
Read p. 80 Fortune
The Earnings Management Culture
Legal, but is it ethical?
Stock Options (Creative Accounting)
- Suspect nature of executives issuing stock options to themselves
- Provide an incentive to exaggerate performance
- If changed to corporate expense would have reduced corporate earnings by as much as 15% in 1999 (many companies expensing options today)
The Profession of Accounting
Is there something about the profession of accounting that encourages unethical conduct?
Conflicts of interest: obstacles to objectivity
- Conflicting values: good client service vs transparency for the benefit of the public
- 75% fees paid to accountants by audit clients in 2001 were for non-audit services (Byron-Low, 2002). (This included ethics consulting).
- Incestuous relationship between accountants/consultants at Enron and Arthur Anderson
Context of the Accounting Profession
- Pressures of time and reduced fees
- Client requests for altered opinions
- Increased competition
- Complex rules and regulations
- Data overload, contingent fees, commissions
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Ethical Issues in Accounting
Do commission structures => unethical behavior?
Ethical Issues in Finance
- Takeovers/mergers/LBOs
- Derivatives
- Ethical Investing
- Price fixing
- Pressures to maximize shareholder value
- Due Diligence/Integrity Issues
- Inside Information
- Stock options issued by executives to themselves
- Fraud
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Cult of the shareholder – max shareholder value and reliance on stock options
Fortune article
Ethical investing article in newspaper
Derivatives
“Derivatives are ‘time bombs’ and potentially lethal ‘financial weapons of mass destruction.’”
Warren Buffett, Chair of Fairfax Financial In letter to shareholders Mar. 3, 2003
“What matters is how they’re used, that the risks are understood by the players – and that they are well managed.”
Head of Office of the Superintendent of Financial Institutions G&M, Mar. 12, 2003)
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Value of unregulated derivatives approximately US$128 trillion, 4X underlying assets of global economy
Used to create some of the big fraud cases
Their company avoids companies that are highly exposed to derivatives
Instruments that call for money to be exchanged at future date (depends on interest rates, stock prices, or currency values)
Ethical Investments
- Do Gooder Funds – invests in corporations with good environmental records and enlightened stakeholder relations
- Objectionable Funds – screen out objectionable corporations; e.g., those to do with alcohol, tobacco, weapons, etc.
Ethical Investments
Does the financial community really believe in socially responsible investing or is this simply a response to market demand? Does it matter?
Quote of the Day
“The price of greatness is responsibility.”
Sir Winston Churchill
British Prime Minister
Nobel Prize Laureate
