Business Ethics – Financial Accountability
Financial Accountability and Ethics.
The principle of financial accountability and ethics has been brought to the lime light by
the increased awareness of the public and the demands for increased accountability in
managing the public resources. Public enterprises are legally and ethically required to
fulfill all the public accountability obligations. Examples of public enterprises include
commercial undertakings or projects that are being funded by the government.
PRACTICE:
Financial Accountability in public and private firms is regulated by the American Institute of
certified public accountants.
Financial Accountability is a fact that has to be considered by all corporations and private firms.
Auditors and Accountants together with the top management of public corporations have been
charged with the responsibility of implementing the principle of financial accountability and
putting it in practice. These concepts are standard and are accepted in most parts of the world.
Other legislation have been enacted to enhance its performance and implementation. Sarbanes-
Oxley Act of the year 2002 was enacted on 30 th July 2002. The other name of the act is
the Public Company Accounting reform and the investor Protection Act in the house of
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the senate and the accountability and the Responsibility Act in the house or the Sarbanes-
Oxley as It’s popularly known. It’s a federal law that was enacted to enhance the United
States boards or to ensure compliance, accountability and management of public
companies and the public accounting companies or firms. (Beckstead, 2006) The PCAOB
came into being or was enacted as a result of reaction to major scandals in accounting and
corporate world in the U.S. PCAOB (Public Company Accounting Oversight Board) was
charged with the responsibility of overseeing, disciplining, and regulating accounting
firms and inspecting them. The PCAOB also covers corporate governance, financial
disclosures, and internal control systems.
PARTICULARS: Congress discussed and passed the PCAOB as a result of the scandals
that hit the country in the corporate sector. (Sissell, 2006) This Act was meant to stream
line and regulates the management of accounting firms in the US. The Act strengthens
the corporate and management governance in the public and private sector by increasing
transparency in financial accounting and auditing. The Act attempted to control the
activities of major accounting firms and the boards of public companies by creating the
PCAOB to set the overall auditing standards. A new and strict definition of the
independence of the auditor general was implemented.
The major components of financial accountability are a) Maintenance of Standard accounting
practices and concepts. b) Accurate and reliable accounting records c) Proper systems of controls
to minimize frauds and embezzlement. d) Separation of company and personal interests in
business transactions. e) Financial Ethics
The criminal penalties for unethical and fraudulent activities were intensified under the
PCAOB and the time frame for financial information disclosures and their content also
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came under the strict scrutiny of the provisions of the PCAOB. The PCAOB has over the
year’s motivated and encouraged public companies to go private in a way to cut down
high costs related to the compliance of the SOX Act (Hartman, 2005). Some multi-
national companies have opted to stay clear of the US market in order to avoid the effects
of the PCAOB. (Kuschnik, 2008)
PERSONS:
Sarbanes-Oxley Act of the year 2002 is largely associated with the two individuals,
Sarbanes and Oxley, who spear headed the campaign to promote the Public Company
Accounting reform and the investor Protection Act in the house of the senate and the
accountability and the Responsibility Act in the house or the Sarbanes-Oxley as It’s
popularly known. It’s a federal law that was enacted to enhance the United States boards
or to ensure compliance, accountability and management of public companies and the
public accounting companies or firms.
PERIOD:
The activities to promote public financial accountability reached its peak in the in the year 2002
after the Enron scandal and the folding up of the giant Arthur Andersen auditing and accounting
firm. Between the years 2001 and 2002, more than seven large national and private companies
went bankrupt following the mismanagement of financial resources. The introduction of the
PCAOB (Public Company Accounting Oversight Board) was implemented to protect the
rights of the public and also prevent the abuse of the public’s right to fair disclosures and
accountability by the auditors.
PLACES:
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Most of the Corporation’s failures took place in the US but other countries like the UK also
experienced similar problems.
The activities to promote public financial accountability reached its peak in the in the year 2002
after the Enron scandal and the folding up of the giant Arthur Andersen auditing and accounting
firm. Between the years 2001 and 2002, more than seven large national and private companies
went bankrupt following the mismanagement of financial resources.
PHRASES:
The phrases commonly used like the SOX act that refers to the PCAOB (Public Company
Accounting Oversight Board) that was charged with the responsibility of overseeing,
disciplining, and regulating financial accountability both in public and private firms and
also inspecting them.
PICTURES:
The history of the US Corporation’s failures painted a grim picture in the investment world
before the year 2002, just before the US congress created the oversight accounting body to
regulate financial accountability in the US and also enacted an enabling statute. Half of the
Corporations failures occurred between the years 2001 and 2002. Following the creation of the
PCAOB (Public Company Accounting Oversight Board) a notable improvement in the
management and accountability of public resources has been registered.
History of the US Corporation Failures
Year Company name Industry
1989 Texaco Oil
1998 Long Term capital MGN Hedge
Fund
2001 Pacific Gas and Elect Co. Energy
2001 WorldCom Telecoms
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2001 Enron Energy
2001 Chiquita Brands Int Food
2002 Kmart Retail
2002 Adelphia Communication Cable TV
2002 Arthur Andersen Accounting
2005 Bayou Hedge Fund Group Hedge
Fund
2005 Refco Brokering
2008 Lehman Brothers Banking
2008 AIG Insurance
2012 Dynergy Energy
PROSPECTS:
Full financial accountability can lead to improved performance in public and Private Corporation
that may also result in faster economic growth. The greatest beneficiaries are the public and the
private investors who for many years have been losing their hard earned investments.
The accounting profession can use the improved financial accountability which is
currently mandatory as stipulated in the SOX Act and its better regulated by the
government instead of self regulation. In a liberalized market it was prudent that the
accounting profession regulates itself. But with scandals that have almost brought
disrepute to the accounting profession, it was strongly recommended that the accounting
profession be brought under the strict and direct scrutiny of the governments oversight
authorities like the PCAOB. These would protect the rights of the public and also prevent
the abuse of the public’s right to fair disclosures and accountability by the auditors.
PROBLEMS:
Full accountability is still farfetched but measures taken are adequately improving the current
status of financial management mostly in public Corporation.
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Some multi-national companies have opted to stay clear of the US market in order to
avoid the effects of the PCAOB. (Kuschnik, 2008) These effects have reduced the
investment opportunities in the US and also affected employment levels. It has however
increased accountability in the public sector.
The logics have never been proved to be inaccurate or irrational in anyway.
The recommendations have not been challenged anywhere in the US.
The implementations of the recommendations require that competent and trained
professional accountants be employed in the financial departments. The services of
most accountants are reasonably expensive.
PERFORMANCE:
Some multi-national companies have opted to stay clear of the US market in order to
avoid the effects of the PCAOB. These effects have reduced the investment
opportunities in the US and also affected employment levels. It has however increased
accountability in the public sector. (Kuschnik, 2008)
Corporate fraud has definitely reduced following the enactment and the consequent
implementation of the provisions of the PCAOB in the year 2002. PCAOB has eleven
sections which deal with all aspects of the accounting profession.
This provision encourages accountability and integrity in matters relating to the
management of the state enterprises and large corporations.
It brings on board a lot of accountability in the accounting profession relating to the
auditing of public and private companies. (Kimmel, Paul, Weygandt, Jerry, Kieso and
Donald, 2011)
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Finally to conclude, financial accountability and ethics has been a debatable issue in the
American public discussions after the failure of big corporations which were under the
watch of reputable accounting firms. Lack of clear ethical standards related to financial
accountability was attributed to most of these failures. In the year 2002, the US
government decided to regulate the accounting industry by enacting the famous SOX
Act to control the financial malpractices in the accounting sector. Financial accountability
and ethics border on decisions that affect the performance of a corporation and which
can be guided by prudent personal decisions.
PUBLICATIONS: The major publication on the PCAOB also known as the SOX act was
published by Kuschnik, B. (2008) The Sarbanes Oxley Act: “Big Brother is watching”
you or Adequate Measures of Corporate Governance Regulation in the Rutgers
Business Law Journals.
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References
Kimmel, PhD, CPA, Paul D.,Weygandt, PhD, CPA, Jerry J., Kieso, PhD, CPA, Donald E.
(2011). Financial Accounting, 6th Edition.
Wiley Kuschnik, B. (2008) The Sarbanes Oxley Act: “Big Brother is watching” you or
Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law
Journals.
Sissell, K. (2006) Committee to Recommend Changes to Sarbanes-Oxley Act. Chemical
Week 68, 31:
Hartman, T. (2005) The cost of being public in the era of Sarbanes-Oxley. Foley and
Lardner Presentation, June 2005. Hay, D.C.
Beckstead, B. (2006) Sarbanes-Oxley
