Question

Explain the relationship between the company's unethical accounting practices and the decrease in value of its stock?

Answer 1

Ethics is the basic concepts and fundamental principles of the conduct of human which involves knowing the difference between good and bad, rights and wrongs. It is synonymous with morality, honesty and integrity. Accounting ethics are standards of right and wrong conducts that apply to the accounting profession.

Ethics has become an essential area of concern in the accounting profession at present due to numerous corporate scandals that has happened in the accounting world which will question the credibility of the Profession. One important example is the case of Author Anderson in ENRON whose practicing license was withdrawn and his reputation rubbed in the mud. If accounting ethics are maintained, the financial statements of companies would be accurate, truthful and reliable.

There are rules and regulations in accounting in order to ensure that financial statements are useful to their end users in their financial decision-making. Financial statements will not be useful unless the information presented therein are accurate, faithful to the financial circumstances and produced in time to help the decision-making process. Poor ethics in accounting result not only in increased incidences of criminal activities, but also hurt the business through harming its reputation (Goodwill) and rendering their financial statements untrustworthy and thus useless.

Unethical accounting practices lead to various consequences. Hence, it is essential that every accountant uphold their principles and focus more on their ethical sensitivity. In this way, it would be easier for them to recognize ethical dilemmas in their work which will maintain the stakeholders’ confidence in them.

Poor ethics by accountants can also cause damages on the reputation of the business and trustworthiness of its stakeholders e.g customers and business partners. When there is no trust, the business finds it difficult to conduct business with other business. This is a devastating damage to a business' reputation particularly to accounting firms who rely heavily on that reputation and goodwill to remain in business. I can remember vividly that Arthur Andersen LLP perished as a business due to its poor conduct in the Enron scandal.

Investors in Nigeria have lost several billions of dollars through the collusion of accountants and external auditors with companies’ management and directors to falsify and deliberately overstate companies’ accounts. As a consequence of unethical practices by accountants and auditors, which have resulted in the distress or occasionally the closure of companies, some indigenous Nigerian Managing Directors of multinational corporations such as Lever Brothers Nigeria Plc and Cadbury Nigeria Plc have been sacked and replaced with expatriates. Some companies placed under receivership have also lost billions of dollars due to professional misconduct by their official receivers. Contrary to the claim of ‘protecting the public interest,’ accountants and auditors may be partly responsible for cases of distress and closure of companies and banking institutions in Nigeria. However, the various Statutory Provisions and Acts relating to companies and professional bodies all place the responsibility on the accountants and auditors to detect and report to the regulators cases of suspected fraud and accounting malpractice. Through detailed consideration of cases of fraud, falsifications and deliberate overstatement of companies’ accounts, this paper examines the claim that the professional bodies are capable of protecting the public interest. It utilizes archival documents to provide evidence that suggests professional misconduct by accountants, particularly the members of the Institute of Chartered Accountants of Nigeria (ICAN). The paper provides further evidence that ICAN has been reluctant to either investigate or sanction its erring members. The paper posits that the reluctance or inability of the ICAN's “Investigation and Disciplinary Machinery” to either investigate or discipline the erring accountants and auditors suggests that whether by design or default, the ICAN's “Investigation and Disciplinary Machinery” operates to shield the activities of its erring members in accountancy firms from critical scrutiny.