Review of Accounting Ethics: Assignment Table of Contents Introduction 3 Satyam Computer Services Ltd. and the Accounting Scandal 4 Connotation of the Accounting Scandal & Recommendation 5 Conclusion 6 References 7 Introduction The principles of business ethics help companies to increase their positive outcome, while lessening the ill impacts of their business activities on the general public. Even if, business ethics is frequently used as a substitute of corporate social responsibility, it is important to note that business ethics is chiefly associated to business decisions that the society considers as right or wrong. The implication of accounting ethics in the interest of the society is larger than before in the contemporary aggressive business environment.
The concept of accounting ethics had developed recently post the occurrence of number of high profile corporate scandals that resulted in the collapse of organizations like Enron and Worldcom. Governments have also been endeavouring to increase the regulation and monitoring of companies in order to ensure the safety and protection of the interests of the common investors and the preservation of business ethics as well as social responsibility in the business environment. It is now obligatory for publicly listed companies to issue their audited annual accounting reports, consisting of full financial information of the company.
The primary objective of business ethics monitoring consists of the formulation of regulatory policies that aims to safe guard the interests of the society as a whole. Thus, in comparison to the past, the present business and regulatory environment is relatively more conductive to ethical behaviour. In this study we would focus on the recent accounting fraud in Satyam Computer Services. Satyam Computer Services Ltd. and the Accounting Scandal The company was instituted in India in the year 1987 by B.
Ramalingla Raju, the founder and chairman of the company. The company operated in the information technology as well as business process outsourcing across a number of industries. From the year 2003 to 2008, the company performed really well in terms of finance as well as business. It realised a decent yearly compound growth rate during that five year period and its revenue during 2008 was over $2 billion. However, during the later parts of 2008, it was found that the Chairman of the company had actually tunnelled the profits of the company by means of self-dealings.
The actual profits of the company were much higher that were revealed in its financial statements. The chairman used the hidden profits for personal benefits, and had also opened large number of fictitious salary accounts of non-existent employees and used that fund for private dealings. Moreover, none other than the Chairman and his immediate family had access to complete company information. This was a case of grave negligence and non-conformation of the accounting and auditing standards, which every corporate organization is supposed to follow.
As result, the main loses in this case were the small investors while the promoters of the company benefitted illegitimately. As a result of the disclosure of the accounting scandal, companies like Merrill Lynch as well as State Farm Insurance discontinued their associations with Satyam. Additionally, the share price of the firm fell to an all time low owing to the scandal. Following this the board of the company was dissolved and new nominal directors were hired by the Company Law Board.
Nevertheless, the business operations of Satyam were acquired by Tech Mahindra during April 2009 to form a company named ‘Mahindra Satyam’. The Satyam case was contradictory to the Enron Scandal where the managers of the company conducted accounting fraud in order to hide the losses of the company. In the Enron scandal case, Jeff Skilling and Ken lay, two of its Chief Executive Officers were guilty of intentionally keeping away from being familiar with the illegal and unethical dealings that were occurring in the firm.
The management of Enron overlooked the corporate governance policies and accounting ethics standards, and allowed Andrew Fastow, its Chief Financial Officer, to establish private partnerships to carry out dealings with Enron. Actually, the dealings with these partnerships were utilised to hide the losses and debts of Enron, and hence the published incomes of the company were incorrect and inflated (Vinten, 2002; Jickling, 2002). In case of Satyam also, private partnerships were used. However, unlike Enron, here they were used by the Chairman of the company to use or shove away the profits of the company, which originally belonged to the stakeholders, for individual benefits.
Thus, it can be drawn that the Satyam scandal was an exclusive case of disregard of fiduciary responsibilities, total negligence of ethical norms and absence of corporate social responsibility by the promoters of the company (Shihur, 2011). Connotation of the Accounting Scandal & Recommendation Conformity with the audit standards is an obligation that every corporate organization is required to abide by. The audit report is an autonomous report prepared by external auditors after collecting and evaluating facts in context of publications and statements about the financial activities and dealings of the company.
Following the assessment, the auditors determine the extent of abidance between the declarations made by the company and the necessary auditing standards, and establishing their view through the audit report. The quality and dependability of audit report and observance to the approved practices of audit standards has been a subject of debate in the corporate surroundings. Observance to audit standards practice assists a corporate firm to trim down risks as well as optimize its business performance simultaneously.
In the modern day competitive business environment that demands for a strict regulatory setting, adherence to audit standards and policies assists companies to uphold in the long duration (Samontaray, 2010). The function of audit committee is very vital in the observance of audit standards. The audit committee as well as the audit firm should correspond and be in touch with each other at every stage of the audit procedure. The participation of the audit committee is very important in the planning phase of the audit process. Even if the audit plan is the accountability of the auditor, it is very important that the audit committee understands the plan entirely.
In doing so, the audit committee can broaden the range of the audit if necessary, after discussions with the auditors (Hoitash et. al., 2009). An independent audit committee is a chief ingredient of a strong corporate governance configuration. The members of the audit committee have to typically focus on meeting with the exterior auditor and make sure that quality of the audit service is preserved. The audit committee is required to increasingly evaluate the functioning of the auditor all through its period of engagement as well as during the development of the audit.
The audit committee has to ascertain that the standards for evaluation of performance are extensive enough to incorporate the value conveyed to shareholders along with the audit (Hoitash et. al., 2009). Conclusion The subject of accounting ethics is related with the jobs and responsibilities of a company’s Board of Directors in managing the business and their relations with the organization’s shareholders along with other stakeholders. Typically, in any corporate firm the full time executive directors hold far-reaching powers in terms of the dealings and matters of the firm, they are paid to manage on behalf of the shareholders.
However, the executive directors might not constantly bear the interests of the shareholders in their mind whilst performing their executive responsibilities. As seen in the case of Satyam Scandal, the Chairman was fudging the accounts of the company for years and it did not come to the notice of other members in the management. Consequently, this has become crucial to make the directors more accountable for their strategies and actions.
The enclosure of non-executive or independent directors in the board of a firm and the incorporation of an efficient Audit committee are imperative to control the occurrences of accounting scandals and maintenance of ethics. References Hoitash, U., Hoitash, R., & Bedard, J. C. (2009), Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes. The Accounting Review, 84(3): 839-867. Jickling, M. (2002). The Enron Collapse: An Overview of Financial Issues. CRS Report for Congress. Shihur, S. (2011). Tunneling vs Agency Effect: A Case Study of Enron and Satyam.
Vikalpa, Volume 36, No 3. Samontaray, D. P., (2010). Impact of Corporate Governance on the Stock Prices of the Nifty 50 Broad Index Listed Companies. International Research Journal of Finance and Economics, Issue 41. Vinten, G., (2002). The Corporate Governance Lesson of Enron. Journal of Corporate Governance, Vol. 2(4), pp 4-9.