Various situations might lead to unethical practices in the field of accounting. While some people may suppose that unethical practices are intentional and deliberate, others contend that unethical accounting practices are systemic and stem from organizational structure (Mandal, 2010). As such, unethical practices in the field of accounting are complex and interlocking. However, some unethical behaviors may include failure by an organization to reveal its financial information (Mandal, 2010).
This is prompted by the need to influence the stock and share prices of a company in order to woo investors. Failure to reveal full financial information misleads the investors and ensures that a company remains attractive to many potential shareholders. For instance, Enron Corporation failed to reveal all its financial information to the shareholders. This was despite its poor performance and bleak future. The investors continued to buy stocks of the company until its collapse. It is important to note that the management of Enron did not intend to mislead the public but acted to protect the company from imminent collapse. Besides, the company had adopted accounting standards that were distinct from other companies.
Second, unethical accounting practices may emanate from failure by an organization to utilize Generally Accepted Accounting Standards (GAAS). Many firms adopt accounting standards that increase loopholes for unethical practices (Mandal, 2010). This may translate to systemic financial problems and unethical behaviors. For instance, it may prompt an organization to evade taxes. In fact, many companies that utilize distinct accounting standards face allegations of tax evasion. Third, poor corporate governance may lead to unethical accounting practices. Corporate governance is a major aspect of an organization that may either increase the efficiency of an organization or reduce its transparency and accountability.
The rationale is that unethical accounting practices thrive under contexts of poor corporate governance. Some of the unethical practices may include greed, disconnection and ignorance. Due to the increase of unethical practices, Sarbanes-Oxley Act of 2002 was enacted to enhance sobriety in accounting standards across the country (Mandal, 2010). In fact, collapse of such corporations as Enron, WorldCom and Adelphia necessitated the act. Its enactment had various impacts on the financial and accounting standards of various companies.
At the outset, Sarbanes-Oxley Act of 2002 increased transparency and accountability of many organizations operating in the United States. According to Shakespeare (2008), litigations relating to unethical accounting practices have dropped tremendously since the introduction of the act. In fact, the litigations dropped by a whopping 67% between 2002 and 2005 (Shakespeare, 2008). In addition, it is important to highlight that many publicly traded companies increased their predictability. In other words, the act allowed the investors to access actual financial information of public companies. This has reduced the uncertainty that typified the US stock markets.
Despite the positive impacts that Sarbanes-Oxley Act of 2002 had on accounting practices, many critics have pointed out that it has reduced the competitiveness of US stock markets (Shakespeare, 2008). The rationale is that small companies in the US opt to be listed in other stock markets outside US. This is due to the stringent measures that the act prescribes upon failure by a public company to abide by GAAS. In fact, the failure by many small and medium sized companies to list their stocks in the US led to the escalation of the economic crises of 2007-09.
To this end, it is important to review the impact of Sarbanes-Oxley Act of 2002. Has it been effective in promoting ethical accounting standards and general economic welfare?
Mandal, S. (2010). Ethics in Business and Corporate Governance. New Jersey: Prentice Hall Publishers.
Shakespeare, C. (2008). Sarbanes–Oxley Act of 2002 Five Years On: What Have We Learned? Journal of Business & Technology Law, 3(5), 320-340.