Business Ethics

It is not surprising that business ethics has become a required accounting course. Over the years fraud has been a continuing issue that has hurt companies and their investors. For example, in 1937 the president of McKesson & Robbins created bogus receivables and inventory which the auditor, Price Waterhouse, failed to confirm. This fraud led to changes in audit procedures that affect financial careers in accounting.

In 1972 the Securities and Exchange Commission (SEC) shut down Equity Funding for fraudulent financial statements from 1964 that were based on false insurance policies and data entered into the computer system. Another audit failure occurred with Lincoln Savings & Loan in the 1980s. More recently, Enron collapsed with a bankruptcy filed in 2001 after restating financial statements for questionable accounting practices. The Arthur Andersen accounting firm was convicted of criminal charges which were later overturned, but gave up its licenses to practice as a CPA firm and disbanded.

As a result of the Enron fraud, the Sarbanes-Oxley Act was passed in 2002. This did several things. It established a Public Company Accounting Oversight Board to register and regulate all public accounting firms. Prior to this time, the accounting profession was largely self-regulated. It also significantly changed financial careers in accounting. For example, the lead audit and reviewing partners must rotate off each client every five years, and public accounting firms may not perform both audit and consulting work for the same client. Company executives must also be more accountable for their businesses and the accounting for those businesses.

Deceptive practices in business aren’t limited to accounting. In 2002 major investment banks such as Merrill Lynch and Salomon Smith Barney paid large fines to settle cases with the New York Attorney General and SEC on deceptive stock analysis. In 2007 the sub-prime mortgage lending crisis foundation was laid with many poor-quality mortgages made with insufficient documentation. These were then repackaged as investments and sold with later huge losses, leading to a crash of mortgage lending and the resultant decline in housing values and sales.

All of these types of frauds and failures have led to a much stronger emphasis on business ethics. Ethics is now a required course for those wishing to graduate with an accounting degree. Also included in the Uniform Certified Public Accounting Examination is a section on business ethics. Because accountants are often responsible for preparing the financial statements and reports that are used by stock analysts and investors, it is important that accountants report what is true and not what is fraudulent. It is also critical that senior managers and executives behave in an ethical manner and don’t perpetrate fraud on investors.

Ethical behavior is important on many different levels. Corporate management has a responsibility to treat customers, employees, and investors in an ethical manner. Corporations might also have a responsibility to behave in ethical ways in dealing with the community, environment, and governments. There is a difference between what is simply legal and what is morally or ethically correct. Inflating sales is clearly wrong, but using accounting rules to find ways to make a company look like a better investment than it really is also does a disservice to investors. There are times when management might choose to do the minimum that is legally required rather than doing what is morally right. Unfortunately, ethical behavior does not seem to be that common in the business world.

Those students who want to major in accounting should take a business ethics accounting course. Other students who will benefit from this type of class are those who want to obtain a degree in business, including in management, marketing, or finance.