As watchdogs of the financial markets, accounting and finance professionals must navigate an array of ethical dilemmas.
Ethical practices and standards grounded in integrity and objectivity guide you on your journey. Upholding these ethics maintains trust, which supports the profession’s reputation and allows accounting and finance professionals to establish solid and long-lasting relationships.
Getting off track can have serious consequences. Unethical behavior leading to a breach of trust can result in lawsuits, loss of clients and investors and reputational damage. Accounting has historically been a self-regulating profession, but when members of the profession break the public’s trust, external regulators must step in.
The Enron scandal is just one example of a high-profile case where trust was broken due to unethical behavior. Executives of Enron, a U.S. energy-trading and utility company, perpetrated massive fraud by manipulating financial statements, using off-balance-sheet transactions, and creating a complex web of shell companies and partnerships to conceal Enron's financial problems.
Enron also engaged in other unethical practices, such as insider trading, bribery, and market manipulation. The scandal cost shareholders billions. Thousands lost their jobs and retirement savings. The controversy also resulted in the bankruptcy of Enron and the collapse of its accounting firm, Arthur Andersen.
In the wake of the scandal, credit rating agencies, auditors and investment banks faced accusations of negligence and, in some cases, deception.
Enron was one of nine large U.S. accounting scandals that came to light between 1998 and 2008. Each of these major scandals risked a loss of public trust in the accounting profession.
Today, accounting and finance professionals still deal with the consequences. The Enron case, in particular, resulted in numerous new regulations, such as the Sarbanes-Oxley Act of 2002 (SOX). SOX was enacted to improve corporate governance, financial reporting, and auditing practices to protect investors and restore public trust in the financial markets by making it more difficult to manipulate financial statements and defraud shareholders.
Building back trust and maintaining it also requires transparency when considering conflicts of interest and necessitates taking action when needed.
Navigating conflicts of interest and bias
Imagine a CFO of a publicly traded company who is responsible for accurately reporting the company's financial statements. CFOs tend to have a significant financial stake in their company's stock price. They hold a large number of shares and stand to benefit financially when the stock price increases, which represents a potential conflict of interest.
CFOs also have a fiduciary duty to management, investors, regulators, and analysts, but the personal financial stake may tempt an unscrupulous CFO to manipulate financial statements to make the company appear more profitable and increase the stock price. These manipulations could include inflating revenues, deflating expenses, or hiding losses to create a more favorable financial picture.
Such a decision would not only violate fundamental ethical principles and be potentially illegal, but it would also contribute to distrust the general public might harbor against the accounting and finance profession.
“There’s a requirement for accountants, no matter what they’re doing, they have to maintain an objective mindset, and that’s not easy to do,” said Cathy Allen, CPA, an expert in the field of accounting ethics and auditor independence and the founder and managing member of Audit Conduct LLC. Allen has educated thousands of CPAs and other professionals about ethical responsibilities, including auditor independence.
“Something that applies broadly to all types of members in practice is conflict of interest,” she said. Unconscious biases can hinder you from seeing potential pitfalls.
“Most of us overestimate how well we judge ourselves and our biases,” Allen said. “It’s not just about you being biased in your mind because of a relationship or an interest, but also the perception of other people. Even if you think you’re totally unbiased, is the reasonable and informed observer going to think the same?”
The perception of objectivity is particularly important in attestation and audits. For independent accountants who perform these services, Allen added, “[objectivity] must be not just in their own mind, but they also must step outside themselves and consider what the viewing public would think. Consider the old Wall Street Journal test where they say, ‘don’t do something if you wouldn’t want to read a summary about yourself in the Wall Street Journal.’”
When allegations of misconduct reach the public, trust is broken, and ramifications are often severe.
“For example, the client finds out that the CPA had a relationship with a competing company, and right away, they say, ‘You couldn’t possibly have been objective,’” Allen said. Another example could be, “What do you do if you were performing an audit and then you learn your firm violated the rules? You were supposed to be independent.”
Transparency in accounting is essential for promoting accountability, trust, and informed decision-making, and it plays a crucial role in identifying and preventing conflicts of interest in financial reporting.
Threats to your integrity can arise in a multitude of situations. Accuracy and transparency counter those threats, and transparency requires proper checks and balances. Understanding circumstances that may compromise your integrity and objectivity is vital to building trust.
Prioritizing ethics amid deadlines
Assessing your biases and potential conflicts of interest early can uncover red flags. Such assessments must be made continually, not just at the start of a working relationship. But what happens when you’re buried in work and focused on an endless task list?
“Everybody is so darn busy just keeping up with deadlines, meeting their obligations. They are not going to say, ‘ethics isn’t important to me,’ it’s just they’ve got their nose to the grindstone,” Allen said.
Amid the hustle of everyday tasks, someone may have crossed an ethical line. Allen recommended that if you realize something is amiss, don’t sit back and hope it goes away.
“You don’t want to sit on something like that and just wait and see what happens,” she said. “Maybe in the long run, you’ll be fine. But I’ve seen a lot of ugly stuff coming out of sitting-and-waiting-and-hoping-it-all-turns-out-OK.”
In the case of Enron, several people involved in the scandal sat on information longer than they should have, including top executives of the company.
What can you do if you encounter noncompliance with laws and regulations?
Discover your responsibilities as outlined by the new noncompliance with laws and regulations (NOCLAR), Responding to Noncompliance with Laws and Regulations.
Knowing when to act
You may come across issues that aren’t clear-cut. They might cause you to wonder: Is this a big deal? Do I need to stop this situation in its tracks? Do I need more information or legal counsel?
When you face an obvious ethical dilemma or something that doesn’t seem quite right, you can speak to a colleague or your manager about the situation. Keep in mind your responsibility to maintain confidentiality of your client or employer's information when doing so. You should also check the appropriate part of the code of conduct. If the code does not address your situation, consider applying the Conceptual Framework Approach.
A good rule of practice, Allen said, is “If it entered your consciousness, it’s something you need to deal with.”
Now imagine you're the busy CFO at a publicly traded company that has suffered a recent publicity scandal. Because of that, stock prices have decreased week over week, and your stakeholders have threatened to take action if you can't turn things around. You were just handed the company's financial statements for the quarter, and you know you could take this opportunity to "clean things up" a little to make them seem better than they are. You know it's wrong, but people's jobs are on the line (including your own). After all, you've worked hard to reach this position, and you'd hate to lose it due to circumstances out of your control.
What would you do?