Ethics Article Review

RUNNING HEAD: ETHICS ARTICLE REVIEW

Ethics in Accounting

Ethics in accounting has faced increased scrutiny since the collapse of the Enron Corporation. In December 2001, the Enron Corporation shocked the world when its accounting firm, Arthur Andersen, was accused of failing to abide by the Generally Accepted Accounting Principles (GAAP); a widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board (FASB). In other words, the accounting firm of Arthur Andersen utilized unethical accounting practices to hide company debt. Senior officers within the Enron Corporation were allowed to cash out stock options while employees' 401(k) accounts were frozen. Employees of the Enron Corporation were assured of financial stability, yet Enron declared bankruptcy shortly there after (Baset, 2002). Arthur Anderson accountants and officials within the Enron Corporation decided to waive a code of ethics because of the potential interference with making a profit. As we have seen with many corporations such as Enron, Tyco, and WorldCom, good ethics does not always account for good business.

Ethics as related to businesses is used as a guide to direct individuals to follow a code of conduct to assist in increasing and maintaining public confidence in their products and services (Baset, 2002). Ethics also serves as a foundation on how to function, live and work within society. Those who chose to practice accounting and financial management are obligated to maintain the highest standards of ethical conduct. However, individuals involved in accounting, auditing, and financial management, are faced with ethical dilemmas, due to being unclear as to ethical standards in businesses.

In providing a clear understanding, accountants and businesses should refrain from actions that would prejudice their ability to carry out ethical duties. This includes avoiding conflicts of interest; the refusal of favors, gifts and reception that would influence actions; and refraining from any activities that would damage the reputation of the profession. Instead, accountants and businesses are responsible for communicating information fairly and objectively; effectively communicating favorable and unfavorable information; and communicating opinions and professional judgments. They should communicate professional boundaries or constraints that would prohibit responsible judgments or opinions (Baset, 2002).

In 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, to guide the reporting of financial professionals. The Act was the most dramatic change to the federal securities laws since the 1930’s; it re-defined the federal regulation of public companies, corporate governance and reporting obligations. It also tightens the accountability standards for directors and officers, auditors, securities analysts and legal counsel (Wikipedia,2006).

Key changes included:

-Effective April 26, 2003, the SEC directed the NYSE and Nasdaq to prohibit listing any public company whose audit committee does not comply with a new list of requirements affecting auditor appointment, compensation and oversight. The audit committee must consist solely of independent directors.

-Effective immediately, CEOs and CFOs must certify in each periodic report containing financial statements that the report fully complies with Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information fairly presents the company’s financial condition and results of operations.

-Certifying officers face penalties for false certification of $1,000,000 and/or up to 10 years’ imprisonment for “knowing” violation and $5,000,000 and/or up to 20 years’ imprisonment for “willing” violation.

-Effective immediately, no public company