Accounting can be described as methodical recording, reporting, and examination of financial transactions of a business or an organization (Duska, 2011). Accounting mechanisms provide investors with appropriate and detailed information aimed at aiding their decision before and after investing in a particular organization. Globalization has resulted in the fraternization of several cultures and socioeconomic systems leading to increased concern about ethics. It is for this reason that, ethics and the importance of ethical decision-making in any organization should be upheld (Duska, 2011).
Causes of unethical practices and behaviors
In finance, different situations may lead to unethical behaviors and practices. Among these practices are misleading financial analysis, exaggerating revenues, security fraud, bribery, misuse of funds, and intentional manipulation of financial information (Duska, 2011).
As an accountant, one can easily be tempted to embezzle his or her organization’s funds for one’s financial gain. Similarly, accountants and other financial personnel may prepare false financial reports to give the impression that the company is performing much better than it really is. Through this, the involved personnel increases their stock portfolios at the expense of their companies, thus acting unethically (Duska, 2011).
Another major situation that may lead to unethical behavior in accounting is the failure of an accountant to carry out a comprehensive analysis during the preparation and revision of financial information. As indicated by researches, failure to adopt inclusive financial analysis methods is not only the leading cause of financial blunders but is also considered a chief cause of unethical behaviors in accounting (Duska, 2011).
Similarly, unethical behaviors can be enhanced by corporate pressure. Though rare, an accountant may be pressured by a client’s needs and desire to report fabricated information to please the client. Likewise, out of fear of losing his or her job an accountant may fabricate their financial reports to suit the company’s proprietors, investors, and director’s desires (Duska, 2011). In doing so, the involved accountants would have perpetuated unethical behaviors in their organization.
The effects of the Sarbanes-Oxley Act of 2002 on financial statements
During the year 2002 in the United States, The Sarbanes-Oxley Act was passed as a federal law setting up new ethics for global company boards, management, and public accounting companies (Jelinek, 2010). Before the passing of this bill, several accounting scandals marred Enron and WorldCom corporations. Since its passing, Sarbanes-Oxley has focused primarily on re-establishing investor confidence in the financial markets. As a result, several positive effects have been realized.
Restoring confidence in the accounting profession
The main objective of the Sarbanes-Oxley Act was to improve the reliability of the audit procedures and the consistency of audit reports on issuers’ financial reports. The current assessment of the commission indicates that the commission has taken appropriate steps and measures as outlined by the Act and has progressively restored public confidence (Jelinek,,2010). Based on these assessments, the commission believes that with the new rules coupled with the strengthen integrity, beneficial effects are going to be realized.
Strengthening the Enforcement of the Federal Securities Laws
Through the Act, the commission has greatly restored investor confidence in the capital markets. By strengthening enforcements in the federal securities laws, the commission has not only discouraged wrongdoers’ practices in the capital markets but also recompensed the affected investors. With the evolving post-SOX environment, organizations and firms need to reconfigure their view on how best to tackle the auditor-client exchange (Jelinek, 2010). In conclusion, to comprehend the effects of Sarbanes-Oxley Act’s in future one needs to answer this question: will the firms that fail to understand the Sarbanes-Oxley Act’s changes be faced out in due time?
Duska, R., & Duska, B. S. (2011). Accounting Ethics (2nd ed.). Hoboken: John Wiley & Sons.
Jelinek, K. (2010). Becoming a More Relational Firm in the Post–Sarbanes-Oxley Era.September 2010 / the CPA journal, 1(1), 4.