What Can Happen If an Accounting Firm Fails to Act Ethically or Keep Records Accurately?

Though accountants’ roles have expanded beyond the work of bookkeeping and preparing tax returns, an accounting professional’s primary job duty is still to create accurate financial reports. When an accountant or an entire firm fails to live up to this expectation and produces erroneous or even fraudulent financial reports, the repercussions can be serious – as serious as scandals, lawsuits and criminal investigations.

Scandals and Lawsuits

When accounting firms create inaccurate financial reports, either intentionally or accidentally, they can face scandals and lawsuits. For example, news broke in January 2015 that a Mississippi health system was suing the accounting firm that had handled its financial reporting for more than 30 years due to failures that it claimed led to an $88 million adjustment, according to the Sun Herald. That lawsuit alleges breach of contract, professional malpractice and negligence on the part of the accounting firm.

Inaccurate accounting can also lead to massive scandals, one of the most well-publicized of which was the Enron scandal of 2001, which led to the collapse of a major accounting firm. Texas-based energy company Enron had been a client of Arthur Andersen, a firm with 85,000 employees and 90 years of experience, the Hartford Courant reported. Arthur Andersen was among the largest and most respected accounting firms in the nation, then considered the Big Five, when it was revealed that Enron had used “creative accounting” – really, unethical and fraudulent methods of accounting – to conceal massive debt.

In the aftermath of the scandal, Enron went bankrupt, some of its executives were criminally charged and sent to prison and Arthur Andersen lost its license after the firm was convicted of eliminating documents related to the alleged fraud. Many Enron shareholders lost their retirement savings. In response to the scandal, Congress passed the Sarbanes-Oxley Act, which made accounting firms like Arthur Andersen more accountable and made the penalties for concealing or destroying financial documents more severe.

Ethics in Accounting

The consequences for inaccurate or fraudulent accounting are serious. They can cause accounting firms and their clients to go out of business, cost thousands of employees their jobs and livelihoods and rip off thousands of shareholders depending on their investments. That’s why it’s essential that accounting students learn both the ethics of accounting and the proper practices for keeping financial records. Creative accounting, the use and manipulation of loopholes for deceptive business purposes, is unacceptable.

Well-publicized scandals like Enron were responsible, at least in part, for the inclusion of and increase in ethics courses in accounting degree program curricula. Ethics are essential to long-term success in the field of accounting and auditing, and making ethics courses a part of accounting students’ education is one way to hopefully decrease the amount of scandals in the profession, The CPA Journal reported. While the ramifications of inaccurate and unethical accounting are harsh, accountants can avoid them by paying attention to their work and following guidelines for ethical behavior.

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