What lessons can we learn from the recent business scandals? What ethical principles were violated and what can be done to lessen the chance of future business scandals? There are many factors that contributed to the high‐profile business scandals such as Enron, WorldCom, Madoff, real estate, and the savings and loan failures. Some of these factors and the lessons we can learn from them are:
- Lack of tone at the top levels of an organization. Ethical behavior in business begins at the top—management must set an example of ethical behavior and make it known that ethics is important in the organization. The top officials in recent scandals acted improperly and therefore set a tone indicating that ethics does not matter in the company. If the top people in an organization feel that ethics is important then employees will follow the lead and consider ethical issues in their business decisions.
- Conflict of audit and consulting roles of accounting firms. CPA firms are no longer permitted to be both an auditor and a consultant for a company. Auditor independence is more closely scrutinized under the new regulations that took effect after the accounting scandals.
- Responsibility of top officers. New accounting regulations that were established after the business scandals require that the top officials of companies sign a statement that they assume responsibility for the accuracy of the financial statements and for the internal controls of the company. Before the new legislation some officers claimed that they had no knowledge of improper financial activities being conducted by other employees in the company. Now, it is the responsibility of top management to responsibility for and knowledge of all financial matters of the company.
- Government regulation cannot prevent fraud. The Security and Exchange Commission (SEC) had extensive regulation and reporting requirements, but the requirements were not able to prevent the fraud that occurred in recent business scandals. While the fraud was eventually detected, it was not prevented. Some would question whether increasing government regulation is needed in light of the inability of current regulation to prevent fraud.
- Fraud can happen even when good controls are in place. If someone is inclined to do something that is unethical or illegal, they may be able to get away with it at least for a while. Investors and others who rely on financial information should be alert for unusual or unreasonable information which may be inaccurate.
Having learned some lessons from recent business scandals we may be better prepared to understand how they happened and what can be done to improve the situation in the future. Congress passed new legislation in response to the latest round of business scandals. The most important legislation was the Sarbanes‐Oxley Act of 2002 which added many regulations for companies and auditors. This is not the first time that the government has stepped in to regulate the accounting profession. For example, the Securities and Exchange Commission (SEC) was established to regulate the stock market after some unethical business practices. After the stock market crash of 1929, the SEC was created in 1934 to restore public confidence in the capital markets. Let’s take a look at the latest legislation—Sarbanes‐Oxley.
As a result of the business scandals Congress changed the rules for accountants by passing the Sarbanes‐Oxley legislation. The Sarbanes‐Oxley Act of 2002 contains the following sections:
- Public Company Accounting Oversight Board
- Auditor Independence
- Corporate Responsibility
- Enhanced Financial Disclosures
- Analyst Conflicts of Interest
- Commission Resources and Authority
- Studies and Reports
- Corporate and Criminal Fraud Accountability
- White‐Collar Crime Penalty Enhancements
- Corporate Tax Returns
- Corporate Fraud and Accountability
The Public Company Accounting Oversight Board (PCAOB) added many new regulations for companies that trade stock on the public stock exchanges. The duties of the PCAOB are to:
- register public accounting firms that prepare audit
- establish auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports
- conduct inspections of registered public accounting firms
- conduct investigations and disciplinary proceedings and impose appropriate sanctions on registered public accounting firms
- promote high professional standards and improve the quality of audit services offered by registered public accounting firms
- enforce compliance with this Act
- set the budget and manage the operations of the Board
The U.S. Supreme Court is reviewing the Sarbanes‐Oxley legislation and may decide reduce the authority of the PCAOB. If any Supreme Court rulings do affect the Sarbanes‐Oxley legislation then Congress would need to change the regulations. Perhaps an overall lesson from the business scandals is that ethical behavior cannot be legislated. While ethical standards and effective internal controls can increase the likelihood of ethical behavior, making rules and regulations can never completely prevent fraud.
- How can companies improve the ethical behavior of employees within the organization? Do you think that ethical behavior makes a company more successful?
Ethical behavior is an important aspect in an organization for both the employees and the management. A lot of successful organizations usually have employed good ethical behaviors in both the management and the employees. The ethical behaviors are what may attract or push away customers from the organization and those that are able to attract the customers experience high sales and more profits (Treviño, and Nelson, 2011). Good ethical behaviors in a company also help in attracting investors….
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