Nov 19, 2020 in Analysis

Effect of unethical behavior. Article Analysis
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Effect of unethical behavior. Article analysis

Different people have different definitions for ethics and values. As for some people, values refer to well-founded standards of behavior the society accepts, while other people only define them as moral principles of a particular person, group or community. It does not imply that not doing what is considered ethical is illegal. Unethical behavior can be exhibited in various areas of life, mainly in the business accounting office, church organizations, schools, and even in the non-governmental charity organizations.

 

The pressuring forces in life sometimes contribute to the unethical behavior in the accounting field. In most cases, people compromise their dignity to keep their jobs. Other people do it for personal gain. For instance, if they inflate the value of the companys resources or give incorrect report on the liabilities, they earn a promotion or salary increase for growing the business. Other different situations that might lead to unethical practices and behavior include:

1. Overstating the cost of revenues;

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2. Bribery;

3. Inside trading.

The effects of unethical behavior include:

1. Misappropriation of assets, such as embezzlement of funds;

2. Criminal and civil penalties, if the company is unethical for the point of financial fraud;

3. The company will risk to lose human capital because accountants will not work for an organization that compromises its reputation, integrity, or competence for the fear of losing their practicing license or credentials due to the violation of standards of their professional conduct;

4. Loss of reputation. Businesses that are operating in an unethical manner risk losing the reputation once the community realizes that the business is operating unethically.

The Effects of Sarbanes-Oxley Act of 2002 on financial statements

During financial scandals and unethical practices in the beginning of 2000s, creditors, stockholders and other investors lost large amount of money. Consequently, the US government passed the Sarbanes-Oxley Act of 2002. The main aim of this act is to shield investors and uphold confidence in the financial reporting companies by implementing strict auditing rules (Duchac, Reeve and Warren, 2014).

Sarbanes-Oxley is applicable only to the companies the stock of which is traded on the public exchange, and are referred to as public held companies. Albeit, Sarbanes-Oxley provided a result: Sarbanes-Oxley influenced companies of all sizes (Duchac, Reeve, and Warren, 2014).

Sarbanes Oxley underlines the importance of effective internal control, which is defined as a procedure designed by or under supervision of management or individuals in higher offices in order to

 
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1. Provide reasonable assurance on the reliability of financial statements for external purposes;

2. Protect its assets;

3. Guarantee compliance with laws and regulations.

4. Process information precisely. (Duchac, Reeve, and Warren, 2014).

Sarbanes-Oxley claims that the management and their independent accountants provide a report on the assessment of internal controls of the company. These reports should be filed with annual 10k report of the company. Companies are also required to include these reports in their annual reports to stockholders. These annual reports should include a statement on the responsibilities of managers in the implementation of internal control measures. It should also contain a statement indicating the framework used in evaluation of internal control measures.

Internal control safeguards assets by minimizing fraud, dishonesty, deceit, or misplacement. The main setback in internal control is employee fraud. Employees, who steal from a business, often alter the bookkeeping records in order to conceal their scam. For a business to operate successfully, it requires accurate books. Business must also comply with laws and regulations, and financial reporting standards (Duchac, Reeve, and Warren, 2014). The above objectives for internal controls can be achieved if the following five elements set forth by integrated structure of internal control mentioned below are reinforced. These elements are as follows:

1. Control environment;

2. Risk assessment;

3. Control procedures;

4. Monitoring;

5. Information and Communication (Duchac, Reeve, and Warren, 2014).

Questions for class discussion

1. Explain why the congress passed Sarbanes-Oxley Act of 2002.

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2. Describe the purpose of Sarbanes-Oxley Act.

The Sarbanes-Oxley Act of 2002 has made significant changes on preparation of financial reports. For instance, the act demands that the management assess its own internal controls over the recording of transactions and financial statements. This assessment reduces the risks of misstatements due to scam. Errors of misstatements are triggered by lack of proper error alleviating controls and not by lack of ethics.

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