Accounting Ethics: What Entry-Level Accounting Professionals Should Know Jennifer Sawayda Anderson School of Management University of New Mexico Albuquerque, NM Accounting Facts • Accounting major receive the highest percentage of job offers • Accounting is among the top ten most popular college majors • Approximately 166,700 new accounting and auditing jobs estimated to open up by 2022 • Median average salary for accountant: $65,080 The Importance of Ethics in Accounting • It is unfortunate that many accountants not seem to hold ethics as a major hiring criterion for entry-level accountants • One study showed that among eight selection factors, male public accountants ranked ethics as number six among selection criteria, whereas female accountants ranked it as number four Pressure for Accountants • Pressure from superiors – CFOs are more likely to engage in accounting manipulations due to pressure from the CEO rather than for personal gain • Unconscious bias – Accountants may unconsciously experience bias due to the ambiguity of information, attachment to or familiarity with client, desire for approval, or allowing small indiscretions go unreported • Greed Ethical Risks for Accountants • Eating time: Recording fewer hours than actually worked – May be more common among entry-level as they are just starting out and it might take them longer to complete projects – Most accounting firms have policies against this • Conflicts of interests: An situation that tempts accountants to compromise their objectivity in pursuit of their own interests – Many clients pay as much than or more for add-on services as they for audit work • Inadequate disclosure: Omitting financial information or making it seem less important that investors should know about Ethical Risks for Accountants cont • Misappropriation of assets: Using company assets for personal use • Improper booking: Booking financial information incorrectly – This could include booking information in the wrong time period or recording financial information in the wrong account • Phantom ticking: Acknowledging you completed processes or checked information without actually doing them Examples • Eating time: Kara is a newly hired accountant She is taking much longer on her projects than more seasoned accountants She decides to put in extra hours without recording them so she will not get in trouble for being too slow • Improper booking: At WorldCom accountants were improperly recording expenses and losses as capital expenditures because capital expenditures can be deducted over longer of periods of time This served to hide massive company losses • Conflicts of interest: Arthur Anderson offered Enron both auditing and consulting services It is believed Arthur Andersen had more incentive to overlook Enron’s accounting problems because of the large amount of revenue it got for its consulting fees Examples cont • Channel stuffing: In the early 2000s Coca-Cola shipped extra unrequested inventory to wholesalers and retailers before the end of the quarter to boost earnings • Phantom ticking: John is running out of time, so he skips his review of certain numbers on the company financials but ticks off that he did it just the same • Inadequate disclosure: In 2009 CVS allegedly omitted the fact that it had lost revenues in its pharmacy benefits segment • Misappropriation of assets: Jim used company funds for personal use but marked them down as expenses Accounting Controls to Prevent Fraud • Use a system of checks and balances so that no one person has control over all parts of the transaction • Reconcile bank accounts every month • Verify that corporate credit card account transactions are business-related • Have strong policies dictating the appropriate use of company assets and disciplinary procedures for fraud • Conduct fraud risk assessments and have an empowered and independent audit committee • Have reporting mechanisms in place • Contract with third parties to conduct audits Preventing Fraud as an Entry-Level Employee • Know company policies regarding proper use of company assets • Undergo training to recognize fraud risk areas • Be accurate in recording time and resources used for projects • Disclose any conflicts of interest that might affect your objectivity • Be familiar with reporting mechanisms Rules Are Not Enough Many people think accounting is a science, where one number, namely earnings per share, is the number, and it’s such a precise number that it couldn’t be two pennies higher or two pennies lower I come from a school that says it really is much more of an art Joseph Berardino, Arthur Andersen’s former CEO The Importance of Principles • Andy Fastow, former CFO of Enron, admits responsibility for misleading accounting statements but claims it came about from “bending the rules” an taking advantage of loopholes • He viewed ambiguous financial regulations as opportunities rather than risk areas • Principles and “obeying the spirit of the law” are important for recognizing ethical risk areas and stopping them before they snowball into Enronesque crises