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The Importance of Ethics in Accounting

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  • 0:07 Ethical or Not?
  • 0:42 What Are Ethics?
  • 6:12 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Ethics - are they really important in accounting? In this lesson, we will discuss what ethics are and what role they play in accounting; we'll also review a case that is deeply rooted in ethics. In the end, we will decide whether or not ethics are important in accounting.

Ethical or Not?

Lilli is an accountant for a manufacturing company. One day her boss, Bob, calls her into his office to discuss the company's financial statements. Bob tells Lilli that he needs to impress a potential investor, so he wants her to 'fluff up' the financial statements. Lilli is shocked. She can't believe that Bob would ask her to do something like that. In her opinion, it would be totally unethical! What do you think? What do you think ethics are? Do you believe that ethics are important in the accounting profession? Let's look at a few things before you make your final decision.

What Are Ethics?

How do you define ethics? The Merriam-Webster dictionary defines ethics as the discipline dealing with what is good and bad and with moral duty and obligation (Merriam Webster, 2013). Basically, ethics means doing what is right.

There is no better way to discuss ethics and accounting than to take a look at one of the biggest scandals in the last decade - the Enron scandal. Enron was created from a merger between two companies: Houston Natural Gas (a gas company) and InterNorth (a gas pipeline company). In the beginning, Enron was on shaky ground financially. In an attempt to make the company a success, then-CEO Kenneth Lay recruited a young and shrewd business consultant. His name was Jeffrey Skilling, and he was full of ideas. Before long, the Enron company was a major player in the world of energy, dominating energy contracts, branching out to trading electrical futures, and even delving into the e-commerce world of Web-based commodities trading.

A defining moment for Enron came in the year 2000. At a meeting of stock market analysts and potential investors, Jeffrey Skilling stated that the broadband network side of the Enron business was worth over $29 billion dollars. The financial statements that Enron made available to the public supported Mr. Skilling's comments on the value of the company. People went crazy over this news, and within months, the amount of Enron stock purchased by investors had increased 50%. It's sad to say, but it was all a lie. The leaders of Enron didn't want the public to know the truth. They hid debts and losses by shifting dollar amounts to offshore accounts. They purposefully made it look as if the company was rolling in money by misstating revenue. They lied to their employees, their stockholders, and any potential investors. Was that ethical? Certainly not!

How could Enron executives pull off all these lies on their own? They didn't. They had a little help from an accounting firm by the name of Arthur Andersen. The Andersen firm provided accounting services to Enron. From posting transactions to creating financial statements, they were responsible for it all. Since that is the case, then it's obvious that Andersen executives made a conscious decision to hide the true extent of debt that Enron held. They also made the decision to provide the Enron executives with bogus financial statements that supported the boasts made by such people as Jeffrey Skilling. Why would they do such a thing? The answer is simple. The more money that investors put into Enron, the more money that went into the pockets of both Enron and Arthur Andersen executives.

It wasn't long before the Securities and Exchange Commission (SEC), alerted by the almost unbelievable statements being made by Enron executives, began an investigation into the financial practices of the company. Upon learning of the SEC investigation, two Arthur Andersen executives instructed other employees to shred all information related to the true financial status of Enron.

On December 2, 2001, Enron filed for bankruptcy, publicly revealing for the first time that financial reports had been inflated for a long time just to make the company look rich in assets. In the battle to place blame and save face, members of Enron's executive board stated that the real fault should fall on the Andersen firm for failing to notify members of the board of the questionable factors on the financial statements and for not fulfilling their responsibilities as auditors. In response, Arthur Andersen executives placed the blame on Enron itself for having a faulty business plan that caused the company's demise.

Regardless of the blaming game, key members of Enron's executive leadership committee, as well as those of the Arthur Andersen firm, were convicted of felonies for their roles in the scandal. In addition to that, the Andersen firm had to surrender both its CPA licenses and its right to practice to the SEC.

Why Are Ethics Important in Accounting?

What are some of the unethical actions that occurred with Enron and Arthur Andersen? Overstating assets and profits was unethical, as was reporting items that didn't exist. Lying to potential investors was unethical, and so was lying to employees. Shredding financial documents was unethical. Hiding debts and losses in offshore entities was unethical. Another highly unethical action was the partnership in planning the financial fraud scheme that occurred between Enron executives and Arthur Andersen executives and the intent that these individuals had to grow rich on the misfortune of others.

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