Business leaders, entrepreneurs, owners and directors have the primary and major responsibilities of maintaining ethics and integrity in running a business and in financial reporting. Making profits, earning revenues should not be the only objective of running a business. Nevertheless, this is the starting-point of most unethical activities in the corporate reporting and operational activities.
Why do business leaders choose unethical practices? To be straightforward, the reasons could be to look for short-cuts in gaining financial benefits, to enjoy good life, more possessions, obtain undue financial advantages by deceiving shareholders, tax, VAT authority and so on. It is a grim reality that greed in the business and finance world is increasingly blurring the ethical boundaries. Business leaders need to ask themselves whether what they want, at any point in time, is in fact what they might choose if they took a broader view of their own self-interest (including that of their community and country).
Recently we came across an incident involving a pharmaceutical company which was preparing documents for share market enlistment/IPO (initial public offering) listing. One accounting firm took the assignment to prepare International Financial Reporting Standards (IFRS) compliance accounts for the business as a step towards getting the business listed with stock exchanges. The owner/ management of the company gave the accounting firm ten pages of accounts showing sales, profits, assets, etc. When the management was asked for records, documents, ledgers, bank statements, vouchers, invoices, they informed that the records and documents were kept by another partner of the business, who sold his share to the present owner.
The management could not provide a single document/record during the three days of review period. All they were asking was to make the IFRS compliance, which ultimately they did get and they went for the next step and got an audit report with clean opinion from another accounting firm, and moved ahead with the listing process. The reason is clear, one of the owners left the business and took his capital and the business needed to get fresh capital at the cheapest rate without being obligated to pay fixed rate interest. The accounting firm which prepared the IFRS compliance accounts was arguing that it was not certifying the accounts, just preparing the accounts based on information provided by the management, and the auditor was arguing that he issued the audit report based on what he received from another audit firm.
This is just one incident. There are many ways businesses are getting through their untrue, unfair, fabricated accounts to be certified by an independent auditor. Government agencies, regulators, such as NBR (National Board of Revenue), SEC (Securities and Exchange Commission), RJSC (Registrar of Joint stock Companies) are the last resort to curb unethical practices whether in corporate financial reporting, tax filing or in the operational practices.
Professionals can never let the desire to earn a better living and acquire more possessions get in the way of following ethical guidelines. An accountant who keeps his eyes on his own bank account more than on his company's balance sheet (compliant of rules, principles) becomes a liability to the company and may cause real accounting or other local law violations, resulting in sanctions from the SEC, RJSC, NBR or other regulatory authorities.
The effects of ethical behaviour in accounting are far-reaching in the economy. Every business entity has an accounting professional to provide information at some point in the organisation's life cycle. Many accounting professionals are tempted to alter financial results and often rationalise the behaviour by calling it creative or aggressive accounting. Aggressive accounting is the process of employing questionable accounting methods to boost results. An accountant may record revenues and expenses in an incorrect manner or omit expenses altogether. Repeated incidence of aggressive accounting are a result of the lack of ethical behaviour.
A common example of an ethical dilemma involves the management of a firm instructing a subordinate employee to record a transaction in an incorrect manner. For instance, a company with a December 31 year-end calendar year, signs contracts with consumers to perform services. The contracts are usually signed on December 01 and are a year in length. Accounting principles require the company to record the revenue for the contract for one month only, the month of December. The remainder of the revenue is comes in next year's financial statements. However, management may instruct an employee to record the entire amount of the contract in December to boost revenues for the current year-end.
Another example: a parent company may treat its investment in an associate company as simple investment and value the investment at market price to boost assets, equity, net worth of the parent, instead of treating the investment under equity method, which is at the cost of the investment, plus/minus the changes in the equity of the associate.
In another instance we found that for a profit of Tk 400 thousand (4.0 lakh), a promotional expense (bribery) of Tk.100 thousand (10 lakh) was made, meaning that the government officials are getting more and more money than the business itself. While in the developed world the concept of marketing has been changed from advertisement to quality as a marketing tool, here in Bangladesh we are depending more and more on bribery and sacrificing quality.
Unfortunately, ethical dilemmas, such as the example provided, are common. To help curb the desire to practise aggressive accounting and ignore ethical behaviour, the accounting institutes of the country should require accounting professionals to complete professional education courses on ethics. In addition, companies may establish whistleblower hotlines to encourage employees and accountants to demonstrate honesty and integrity in the workplace.
Many accounting professionals argue that ethical behaviour is not to be taught, it is inherent in an individual's personality. In addition, universities note that accounting professors do not like to research or study ethics because of its unscientific approach. The results are difficult to examine and it is hard to gauge the level of success from teaching ethics courses.
Accountants and financial advisers must avoid skirting ethical boundaries when making financial reports to the government and investors to help repair the wide rift between business investment and consumers.
Individuals in the accounting profession have a considerable responsibility to the general public. Accountants provide information about companies that allow the public to make investment decisions for retirement, a child's education and major purchases such as a home. For the public to rely on the information provided, there must be a level of confidence in the knowledge and behaviour of accountants. Ethical behaviour is necessary in the accounting profession to prevent fraudulent activities and to gain public trust.
An accountant working in the public or private sector must remain impartial and loyal to ethical guidelines when reviewing a company or individual's financial records for reporting purposes. An accountant frequently encounters ethical issues regardless of the industry and must remain continually vigilant to reduce the chances of outside forces manipulating financial records, which could lead to both ethical and criminal violations.
The burden for public companies to succeed at high levels may place undue stress and pressure on accountants creating balance sheets and financial statements. The ethical issue for these accountants becomes maintaining true reporting of company assets, liabilities and profits without giving into the pressure of the management or corporate officers. Unethical accountants could easily alter company financial records and manoeuvre numbers to paint false pictures of company successes. This may lead to short-term prosperity, but altered financial records will ultimately spell the downfall of companies when the Securities and Exchange Commission discovers the fraud.
One of the things that we need to recognise is that many people find it difficult to recognise an ethical dilemma as such. It is not that most people are inherently unethical. Instead, the problem is that many people are unaware of the fact that nearly everything that they do has an ethical dimension.
Some people take a similar line when it comes to filling in a tax return, or when producing financial statements or when trying to do a cost-benefit analysis that compares product safety with cost of production, retrenchments with increased dividends to shareholders. Practical concerns and pragmatic considerations can make one relatively blind when it comes to spotting ethical issues.
Accountants have the capacity and the opportunity to look below the surface of this complex society. I am sure that some have taken the opportunity to plumb the depths! Others are more attuned to the light. Whatever the case, members of the accounting profession have an opportunity to go beyond the provision of mere technical advice. Being a member of a profession is to be a member of a community. Ethical issues are not restricted to matters arising in relationships with clients and the community. There is also the very real question of how accountants relate to one another. This goes beyond being a matter of professional etiquette. Whilst matters of etiquette are important as an indication of mutual respect between members of a profession, there is a need to be aware of deeper obligations to one's colleagues. In particular, members of the profession have a responsibility to provide mutual support and encouragement so that it becomes absolutely unquestioned and natural for accountants to present the truth in a fair and honest fashion and in a spirit of public service.
To return to the question of the ethical dilemma, it is perhaps an unfortunate fact of life for us that there really are circumstances in which no system or rules can provide us with a sure and uncontroversial answer. On the other hand, it may be that the existence of ethical dilemmas provide us with two great boons - an opportunity to exercise our freedom and a sense of personal responsibility to engage with others in exploring and developing traditions that provide guidance to communities.
