The dark side of financial reporting

CPAs are expected to demonstrate integrity, objectivity, competence, confidentiality, and professional behavior. While nearly all CPAs follow this code of ethics, unethical accounting practices do occur in the business world, undermining trust and integrity in financial reporting. Whether it's one individual subtly manipulating accounting records to numerous people involved in falsifying financial statements, these actions can destroy an organization through loss of reputation, legal consequences, and financial losses.

Several high-profile scandals stemming from unethical accounting practices have led to stronger calls for regulatory measures and more transparent, robust ethical frameworks within the organization. However, each individual within an organization can play a role in preventing and reporting breaches of ethics.

Examples of unethical accounting and financial reporting practices

The most common examples of unethical financial reporting include:

• Misrepresenting financial statement results
• Falsifying documents or records
• Omitting or manipulating disclosures or other communications
• Engaging in corruption for personal gain

Intent is key with fraudulent or unethical behavior — there has to a clear intent to mislead or deceive another party. For example, a company's management team may intentionally inflate revenues and earnings to deceive investors and falsely boost their stock price.

Consequences of unethical financial reporting and accounting practices

Depending on the extent and severity of the ethical breach, individuals may face loss of career or even incarceration, while organizations may face financial consequences. Let's look at more specific ramifications of unethical accounting and financial reporting.

1. Loss of trust and reputation
2. Financial penalties
3. Legal and regulatory consequences

No matter what the immediate or short-term consequences are, organizations caught in financial scandals are likely to experience long-term economic impacts.

In 2002, an SEC investigation found that internet and telecommunications giant, WorldCom overstated assets in financial reports by $11 billion. While the company's CEO was sentenced to 25 years in prison for fraud, conspiracy, and issuing false documents to government regulation, the company filed for Chapter 11 bankruptcy. By 2006, Verizon bought out the struggling organization.

Identifying accounting red flags

Identifying unethical practices is crucial to maintain the integrity of financial reporting and protect both stakeholders and the public in general. Some red flags may include:

• Inconsistent or unusually complex financial statements?
• Significant discrepancies between reported and actual cash flows?
• Frequent changes in accounting policies?
• Transactions that lack clear business purpose.
• Sudden revenue increases without corresponding business growth?
• Pressure on accounting personnel to meet unrealistic financial targets?
• Excessive secrecy around financial processes.

Recognizing these red flags is the first step in mitigating the risks associated with unethical accounting practices. While all organizations should have clear, confidential, and secure channels to report unethical behavior in place, there are also whistleblower laws to protect you should you need to report unethical or illegal behavior.

Build your ethical knowledge with Becker CPE

Building your knowledge in both behavioral and regulatory ethics can help you recognize and prevent fraudulent or unethical activities. Check out the following CPE courses (or check in your organization's LMS) to dig deeper into understanding unethical accounting practices and how to spot, report, and prevent them:

• Fraud in Your Practice
• Ethical Behavior
• Asset Misappropriation Schemes
• Financial Statement Fraud

A longer version of the original article can be found here: Unethical Accounting Practices