Ethics in the business world is not a new phenomenon. However, recent publicity, mostly negative, has brought accounting to the front lines of business ethics. Due to the magnitude of impact on investors and the market, accountants and auditors are questioned whenever fraudulent activities occur within corporations. Major corporate scandals at Enron, WorldCom and Tyco International have only deepened the public’s lack of trust.
To ensure ethics, and therefore financial stability, professional accountants must make morally sound decisions. Ethics cannot be restricted to merely financial statements and records, but also to the decisions that companies may make and enforce.
For example, lack of ethics fueled abuses at WorldCom, Enron, and Adelphia Communications at the highest levels. Senior level management engaged in unethical accounting practices, allowing financial misrepresentations at each of these corporations, almost always under the influence of top management. During these times, Enron was being audited by Arthur Anderson, which approved the financial statements. In fact, when Arthur Anderson learned that Enron had falsified their data and numbers, and was being probed by the Securities and Exchange Commission (SEC), they began to shred all documents relating to their audit of Enron. In December 2001, Enron, a once-leading energy company, filed for bankruptcy, the largest in U.S. history. It used tactics such as off-the-books partnerships to hide their debt (~$1 billion) and inflate profits to raise their stock prices. Top Enron officers cashed out their own stock options while thousands of workers were left with empty retirement accounts. [1]
Worldcom follows a similar story. At the time, the external auditors for Worldcom were again Arthur Andersen. Under the direction of the company’s top executives, Worldcom used fraudulent accounting methods to artificially inflate their revenues during 1999 - 2002. The company’s stock went up and these top officials enjoyed hefty bonuses. However, in 2002, during an internal audit review, more than $3.8 billion of the fraud was uncovered. Following an SEC inquiry, it was discovered that the company’s assets had been inflated by $11 billion. [2]
In the case of Tyco, two top executives succeeded in stealing close to $600 million in company assets, claiming that this amount was approved by the company’s board of directors. They were eventually convicted on all but one of 30 counts in 2005 and are now in prison. [3]
Adelphia was a victim of internal corruption. Family members that held top positions in various divisions of Adelphia were charged with securities violations after it was disclosed that $100 million had been stolen and $2.3 billion worth of debt had been concealed via complicated cash-management systems.