How Can an Accounting Scandal Affect a Company’s Reputation?

Accounting scandalWhen a major corporation gets caught in an equally massive accounting scandal, the consequences go far beyond bad press in the news. An accounting scandal can be catastrophic for the companies and individuals involved – even, at times, any accounting professionals who played a part in the deceit. As an aspiring accountant, it’s important that you understand the impact of an accounting scandal and your role in keeping a company’s financial statements accurate.

The Consequences of an Accounting Scandal

An accounting scandal can tarnish the reputation of even the most well-respected companies. In July 2015, for example, several high-level executives of Japan-based global computer company Toshiba, including the chief executive, resigned in response to one such scandal. Earlier in the year, the company had been accused of inflating its earning statements by $1.2 billion over a period of seven years, according to The New York Times. Despite Toshiba having an otherwise clean record over its 140-year history, the accusations significantly affected the value of the company’s market shares.

Poor stock performance and internal strife aren’t the only potential consequences of an accounting scandal. Often, companies face fines or lawsuits. In some instances, the executives responsible for the scandal have faced criminal charges and gone to jail.

An accounting scandal can even wipe out entire companies – sometimes multiple companies in a single scandal. A particularly infamous example was the 2001 Enron scandal, in which the energy company was revealed to have covered up considerable amounts of debt through fraudulent accounting. Not only did Enron itself go bankrupt, but the scandal also took down the accounting firm handling the company’s finances. Before the scandal, this firm, Arthur Andersen, was among the biggest accounting firms in the world.

Accountants’ Roles in Avoiding Scandals

With such drastic consequences, it’s easy to see why accuracy and honesty in accounting are of the utmost importance. It’s not only accounting professionals who worry about fraud. Companies, too, are increasingly concerned with business ethics and accounting fraud in particular, according to Accounting Today.

As an accountant, of course it will be your job to help your clients. You can, and should, help them minimize their tax burdens through legal means or make business decisions that could cut costs and improve profits. However, when accountants – whether in-house at the business or as part of the accounting firm that manages the company’s financial reports – participate in fraud, they do more than implicate themselves in a serious crime. Their actions don’t help the client or employer in the long run – they only put the company at risk of an immense scandal and an even bigger fallout.

Accountants have some power to prevent scandals – and that’s by preventing fraud. Obviously, accounting professionals can choose to act ethically themselves, making sure the financial statements they create are accurate. They’re also in an ideal position to notice any accounting inconsistencies or other indicators of possible fraud in the work of others within or serving the company.