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the company has been reported as $2 million whereas according to calculations done by
Mr. A, the value of this property does not exceed $100,000. The reason given by the
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client firm management on reporting the overstated value is that they intend to rent out the
property in near future. The client firm refuses to write down the value of the property and
his superior Mr. B disagrees with him and asks him to leave the problem and issue a clean
report. Mr. A does not comply with the instructions and submits a report pointing out the
overstatement of the balance sheet amount as the difference in the amount is substantial.
The superior takes out the pages submitted by Mr. A from the file, attaches a clean report
and issues a negative evaluation of Mr. As performance. Mr. A is now considering on the
options available to him in this matter. The report will cover an analysis of stakeholder
impact and will explain the course of action Mr. A should take.
Ethical principle - Accounting manipulations and frauds
The area of accounting manipulation is closely related with the field business ethics
and numbers of organizations are sued just because of unethical accounting practices and
using window dressing techniques. Accounting manipulations and accounting frauds are
just playing with the numbers and the accountants through this act can either harm their
own organization or in certain cases they affect the shareholders. The accountants and
individuals that are related with finance department are mainly associated with these types
of frauds. These frauds are deadly for an organization and it negatively affects an
organization in both short and the long run (Wells, 2007). The repute of the organization is
tarnished by these frauds and organizations suffer huge amount of losses because of these
frauds and their customer base are reduced because of this.
In the initial phases when an organization is a private limited company then the
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accountants of this organization can harm them if proper check is not placed on them. They
can change the figures of receipts and in this manner they can harm an organization. Through
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overstating the amount of account payable they can cheat an organization. This
cheating can cause problems for the organization and accountants cunningly can
balance the financial statement of an organization.
Another process used by organizations is on a broader scale where they are
advised by the directors and senior officials of the organization to change the figures of
the financial statements. In certain cases they are even pressurized by the shareholders
to change the figures of financial statements so the value of shares rises up. The
organization use window dressing techniques in this scenario. Window dressing
techniques are used by accountants to present the accounts of the company in a
manner that enhances the financial position of an organization (Jones, 2009).
In a broader sense it is described as a form of creative accounting which is used
for flattering the figures of accounts. There are two aspects on which window dressing
are solely based on these two aspects are liquidity and profitability. In the liquidity
aspect the organization hides the diminishing liquidity position of the organization and
the profitability massages the profit figures of organizations. There are different
methods that are used by organization is window dressing their accounts. These
methods are short term borrowing, chasing debtors, including of the intangible assets,
changing the stock valuation policy, sales and lease back and etc (Coenen, 2008).
The famous methods are stock valuation, inclusion of intangible assets, short term borrowing
and depreciation policy. In the stock valuation method the methods used are LIFO, AVCO and FIFO
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(Biegelman & Bartow, 2006). A change in these methods would lead to different figures that are the
reason why accountants use this strategy. The change the figures can affect the closing stock and
impacts the profits of the company and the value of firms assets is
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effected by stock in the balance sheet. Similarly, in the inclusion of intangible assets
organizations use non depreciated assets to maintain a strong value of its assets and it
gives a misleading view. Another window dressing approach is used through short term
borrowing and the short term borrowing is made just before the date on which the
balance sheet is drawn. All of these frauds are made just to enhance the performance
of an organization but the process of enhancing the performance is not viable because
organizations are infringing the laws and they are not complying with the ethics of
business. The ethical code of conduct is not followed by organizations and that is the
reason why organization can be successful in the short term but in the longer run these
organizations suffer because they are not complying with the rules of business.
The role of auditors and corporate compliance
Auditors are present in nearly every organization and the role of auditors is to ensure the fact
that organizations financial position and financial reporting is appropriate. The element of fraud
auditing is also used by them which basically are defined as the fact which creates an environment
for the detection of frauds and prevention of frauds in transactions that are on commercial basis
(Singelton & Bologna, 2006). The main goal of these auditors is to ensure corporate compliance and
remove fraudulent activities in the organization. The modification of numbers and destruction of
certain records are some of the examples of basic frauds conducted by accountants. Auditors check
the entire accounts and related financial statement of an organization and the first objectives of a
fraud auditor are to identify the fact that whether a certain level of discrepancy is present in the
accounts or not. Then the auditor checks the element of human error present in the accounts. Fraud
auditors check the tone in the entire organization
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and he/she ultimately devises a corporate code of conduct for the organizations financial
policies. These auditors inspect the normal course of business of the organization.
As far as auditing is concerned there are basically two types of audits in an
organization. These two types are internal audit and external audit. The internal audit is
basically conducted by the organization itself and for external audits certain auditors are
hired from auditing firms to check the corporate compliance of the organization.
Besides changing the figures and deleting the accounting records another issue arises
which is related to disclosure requirement and certain organization dont disclose their entire
financial statements and they hide them from their shareholders and present a better picture.
For fulfilling the disclosure requirements and to create corporate compliance a law was passed
which is known as SOX (U.S Congress, 2002). The main purpose of this act was to ensure the
disclosure requirements and organizations have to fulfill the requirements of this law. This act
was passed because corporate giants like Enron, WorldCom, and Tyco International were
involved in corporate scandals that were based on financial reporting. Although the act has
certain shortfalls like it is working as a label for corporate compliance and those organizations
that have adopted this act are free from corporate frauds and its posses high level of cost that is
the reason why small organization cannot afford this act. However, a detailed compliance and
security policy is devised is this act (Sarbanes Oxley, 2006).
Stakeholder Impact Analysis
In order to perform this analysis, the stakeholders in the case must be identified. There are
three stakeholders who would be directly affected by the outcome. First stake holder is the
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accounting firm, the second stakeholder is the real estate subsidiary of an important client and the
third stake holders are the people responsible for audit. The impact of the audit report on all
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three stakeholders is discussed one by one. First let us observe the impact of the amendments
made in the audit report by Mr. B, on the accounting firm. The outcome of this report on the
company would be very helpful in securing the client account for the company but on the other hand
there is a threat to the company as well because when the client company uses the audit report
issued by the company to sell or rent out the property to potential customers, they will be mislead
and sue the accounting firm for the losses incurred due to this report. The company will face a
lawsuit and its reputation will be tarnished as ABC is considered a strong advocate of ethics and
morality especially after strong measures have been taken in ethical and moral standards of audit
firms in the accounting standards as well as the constitution. If the original report submitted by Mr. A
was issued to the client the most drastic impact it would have is that the accounting firm could lose
the client but retain its image of a firm which gives value to ethical and moral standards. Now the
affects of this report on the second stakeholder which is the subsidiary of the client company is
discussed. If the clean report is issued the client company would not have any problems regarding
the proper disclosure of this amount as the overstated amount is not substantial in respect of the
companys consolidated financial statements but the amount is substantial in the financial statement
of the subsidiary as it has a 7 percent impact on the net income of the subsidiary. If the clean report
is issued the task of selling or renting out the property would be much easier for the subsidiary. The
same legal problems would be faced by the company in case of material losses to the buyers who
would file for damages due to misrepresentation. However, if the original report by Mr. A is issued, it
would be difficult for the management of the company to sell or rent out the property or even take
out a loan by mortgaging this property. There would be no significant positive impact on the client
company but it could avoid any future litigation from the potential buyers or tenants of the property.
The
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company could also avoid any future external audit anomalies if the values reported on the
financial statements are accurate and truthful. The third and the last stakeholder of the scenario
is Mr. A himself because if the clean report is submitted he will be the first person to face the
lawsuit as he was directly responsible for auditing the financial statements of the subsidiary.
The positive impact for him would that his one year promotion would be guaranteed if the client
account is secured solely by the accounting firm. The original audit report submitted by Mr. A
would have resulted in the accounting firms loss of the client account.
Influence of Organization Culture
Organizational culture plays an important role in the decision making and different
strategic decisions are taken with respect to the prevalent culture of the organization. In
the similar manner it can be said that organizational culture is important in both the short
and the long run. The culture of the organization incorporates the norms and rules of the
organization. Furthermore, it can be said that when an organization is making ethical
decision making then in this scenario culture of that organization plays an important role.
Researchers and strategist actually believe that an organization culture can be considered
as a proactive culture when it incorporates all the elements of ethical decision making in
both the short and the long run (Ferrell, Fraedrich, & Ferrell, 2000 pp. 113-141). In the
similar manner it can also be said that when the decision making is free from the menaces
of bribery, red tapping, harassment then an organization can prosper in both the short and
the long run. In the similar an organization that does not focuses on the culture and just
focus on the primary aspect of profit making might suffer in the long run.
Therefore, it can be clearly said that the influence of organizational culture is huge on the
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organizations decision making. In the scenario of the case it can be said that Mr. A is facing a
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dilemma regarding ethical considerations in ABC Company. The supervisor Mr. B has
actually changed his report and awarded the client non-qualified. However, the ethical
analysis actually depicts that this organization is a qualified company because it is not
fulfilling the ethical code of conduct and the client is focusing on the faulty accounting
practices. That is reason why Mr. A is quite confused about the situation and what strategy
he should opt. Mr. B (supervisor) has actually implemented this scenario because the ABC
company can progress in this aspect when they award a tag of non-qualified to the client.
This situation depicts the organizational culture and it shows that this organization is
working on unethical practices because for the attainment of profits they can opt for
unethical business practices. The organizational culture actually defines the norms of an
organization and the norms that are present in ABC Company actually depicts that they are
reluctant to ethical implications and it can be easily predicted that since the culture of this
organization is not ethically enriched that is the reason why it can be easily predicted that
the directors of the company would go with Mr. B and they would opt for his policies.
Thus, it can be said that organizational culture of ABC Company is not
appropriate and that is the reason why this culture is creating problems for Mr. A in
both the short and the long run. Furthermore, the dilemma in this scenario is that what
should Mr. A opt for his personal opinions about ethics or he should opt for the
performance of the company which is due to unethical practices.
Influence of Ethics / Compliance Programs
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The development and implementation of an ethics program is not only crucial for
organizational success but it also proves to be effective in various human resource issues. The
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ethics and compliance to ethics program involves a variety of stages which are
comprehensively designed and developed by the company management. It is to be understood
clearly that the ethics and compliance program is not just a code of ethics or code of conduct
but comprises of a variety of elements. The elements in an ethics and compliance program are
lucid organizational values, ethical strategies and ethical goals for decision making purposes,
ethical policies and procedure for implementation of programs, measurement mechanism for
effectiveness of the ethical programs, reward structures in ethical behaviors, guidelines for
implementation of ethical decision making, implementation of ethical training programs, support
programs for implementation of ethical policies and convergence of employee values and
corporate values. There are several benefits of implementing an ethics and compliance
program in an organization which include the loyalty of customers, reduced ethical meltdowns,
increased employee loyalty and productivity, improvement in sales, avoidance and reduction in
penalties and fines, decrease in opposition from various circles of the society, increased
financial performance and decrease in ethical incidents (Ferrell, Fraedrich, & Ferrell, 2000).
The ethics and compliance program of ABC organization would greatly impact the
decision made by Mr. A in regards to the current ethical dilemma. If the ethical and compliance
program is implemented effectively in ABC Company then Mr. A would have no difficulty in
arriving at a conclusion in the current case and could make a decision on whether to report the
ethical misconduct of Mr. B to proper management personnel. If there is in fact an ethical and
compliance program implemented in the company Mr. A would not even have to worry about the
incident happening in the fist place as a strong ethical program would discourage any unethical
behavior by personnel whether old or new. If the management applies an effective ethics and
compliance programs all employees would be properly trained in dealing with ethical issues and
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making proper decisions in ethical dilemmas such as the current situation. In the absence of
such a program employees would be motivated to indulge into unethical behavior without any
check and balances for their personal benefits. Mr. A issued a qualified report for the client who
had overstated the value of one of its assets on the balance sheet but Mr. As supervisor
replaced the previous report with a non qualified report and made negative comments on the
report which were quite damaging for Mr. As career. As a proper ethics and compliance
program has not been implemented in the organization Mr. A is confused about the situation
and what to do in this regard. He must now make a decision based on his own interpretation of
ethical misconduct and moral actions. If a comprehensive ethics and compliance program was
implemented in the organization then Mr. A would not face any difficulties in making a decision
instantly regarding the current situation and in an ethical program a proper channel would have
been available to Mr. A in respect of the current ethical dilemma.
Influence of Rewards and Discipline
Rewards play a very important role in a persons decisions in the workplace. There are two
types of rewards for employees in an organization which are intrinsic rewards and extrinsic rewards.
Extrinsic rewards are money oriented whereas intrinsic rewards are esteem oriented. The extrinsic
rewards include benefits such as salary increments, bonuses and special cash rewards on
achievement. The intrinsic rewards are more esteem oriented and focus on a persons esteem
needs rather than cash rewards. These rewards include promotions, acknowledgement in front of
peers, performance appraisal and appreciation in front of others. Employees of a company are
highly motivated with both of these rewards in different situations. The discipline in an organizational
environment entails that all employees and personnel adhere to the rules,
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policies and procedures implemented in the organization. Several companies have discipline
policies which impose penalties on employees who do not concur with or follow the policies.
Employees usually make decisions which provide them with rewards and provide safety form
disciplinary action. Following the ethical code of conduct may also bring intrinsic rewards and
save employees from penalties and punishments. Alternatively when an ethical code of conduct
is not effectively implemented in an organization, employees may make decisions which are
unethical or immoral for gaining extrinsic or intrinsic rewards without fear of any penalties being
imposed (Ferrell, Fraedrich, & Ferrell, 2000 pp. 141-164).
In the current situation As supervisor has replaced the original qualified report with a un
qualified report for the benefit of the client which could result in confirmation of the clients
account to the company and both A and his supervisor could get rewards after the confirmation
of the account. Mr. A would also get promoted to a higher level in the organization if the client
signs a contract for future services. As ABC Company is more profit oriented and although an
ethical code of conduct is present in the company but it is not implemented quite effectively.
The present scenario would motivate any person in place of Mr. A but he has quite strong
personal ethical values which create a dilemma for him and he is now confused whether to
ignore the actions of his superior and let the unqualified audit report pass on to the superiors or
report the situation to the superiors. If A ignores the matter it may result in rewards for A in the
form of a promotion and if he reports the matter to superiors it may result in failure of acquiring
the clients account which may prove quite beneficial for the company in monetary terms in
future periods of operation. Thus the rewards and discipline culture of an organization impacts
the decisions of a person in an ethical dilemma quite significantly.
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Course of Action
The audit report now in the records of ABC does not have As name as the report
submitted by him was removed by Mr. B and a negative evaluation of his performance and
instead of getting the important one year promotion he faces the threat of being removed of
his position from the accounting firm. The options available to A include leaving the matter as
it is and not reporting it to anyone; he has the right to take this matter to his partner counselor
or personnel department. He personally feels that he should report this matter to an
independent review board but a board like this is inexistent in ABC.
A is a person who strongly believes in the ethical and moral duties of an auditor and
strictly abides by them. He had discussed the report released by Senator Lee Metcalf which
covered the biasness of accounting firms towards their clients with various partners of the firm
and got the impression that the partners strictly believed in the ethical and moral
representation of clients. It should also be noted that it has become more important for
auditors to follow the code of ethics especially after the implementation of the Sarbanes-Oxley
Act which requires the auditors to strictly follow the code of ethics under section 103 (U.S
Congress, 2002). This was the reason ABC had its reputation of setting high standards of
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ethics during the auditing process of different companies. This indicates that if A discusses the
matter with one of the partners, some action might be taken in respect of the situation.
In order to provide a course of action we must compare the benefits and shortcomings of
the options available to A. If A selects the first option and does not report the incident to anyone
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there would be no benefit to him but the company may benefit in case the client account is
acquired exclusively. The first option holds many disadvantages for A as the audit report
now includes a negative evaluation of As performance and he is responsible for the
reliability of the report. In case of any litigation he would be solely responsible for the
consequences and both the negative evaluation and legal issue could jeopardize his
position at the firm. The second option entails that Mr. A reports this situation to a partner,
the benefit of this plan would be that the original audit report is issued and action is taken to
ensure that code of ethics is strictly followed in future. The disadvantage of this option
could cause the client company to cancel its account with the firm. If A is pushed hard to
amend the report or do nothing about it he can go to the Public Company Accounting
Oversight Board which was established with the enactment of the Sarbanes Oxley Act.
Provisions have been made in the act to protect whistleblowers and it has been clarified
any retribution towards whistleblowers will not be accepted (Kleckner & Jackson, 2004).
Conclusion
From the analysis of the whole case and the ethical issues involved the viable
option is that Mr. A report this matter to a partner counselor as this option is more
beneficial for his career and the profession of auditing also demands that code of ethics
be followed and financial information be disclosed appropriately in a transparent
manner. Personally A is also very inclined towards the code of ethics and morality as
he thoroughly studied the code of AICPA for his CPA exam. If the last option does not
work he can eventually go to the Public Company Accounting Oversight Board.
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Reference List
Biegelman, M., & Bartow, T. (2006). Executive Roadmap to Fraud Prevention and
InternalControls: Creating a Culture of Compliance. Wiley.
Coenen, T. (2008). Essential of Corporate Fraud. Wiley.
Ferrell, O., Fraedrich, J., & Ferrell, L. (2000). Business Ethics. Houghton Mifflin Company .
Jones, M. (2009). Creative Accounting, Fraud and International Accounting
Scandals. John Wiley and Sons.
Kleckner, P., & Jackson, C. (2004, June). Sarbanes-Oxley and Whistle-blower
Protections. Retrieved May 20, 2009, from nysscpa.org:
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http://www.nysscpa.org/cpajournal/2004/604/perspectives/p14.htm
Sarbanes Oxley. (2006). Sarbanes-Oxley Compliance. Retrieved December 11,
2009, from Soxlaw.com: http://www.soxlaw.com/
Singelton, T., & Bologna, J. (2006). Fraud Auditing and Forensic Accounting. Wiley.
U.S Congress. (2002). Sarbanes Oxley Act 2002. Washington: U.S Congress.
Wells, J. (2007). Corporate Fraud Handbook. Wiley.
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