The Most Effective Means of Achieving Accountability in Organizations - Book Report/Review Example

 Introduction Accounting as a type of profession that should be practiced based on a strong ethical foundation. Since accounting information is normally used when making important economic and business decisions (Eisen 2007, pp. 1 – 2), accountants are required to protect not only the economic welfare of a business organization but also the external stakeholders which includes the public investors. For this reason, accountants should be held responsible and accountable when presenting accurate financial statement based on the generally accepted accounting principles in the United Kingdom (Young 2006). Large-scale businesses involves large sum of money which increases the risk for corruption. In line with this, the board of directors and the business executives are among the group of people who are usually behind the development of a corrupt business culture. Given that the shareholders within a business organization have the power to appoint or dismiss the members of the board of directors, the corporate law in Europe considers the need to investigate the shareholders and board of directors in situations wherein the practice of accounting fraud is suspected (Dine 2008). In this report, reasons why accounting is not the most effective way to achieve accountability within a business organization will be tackled in details. As part of going through the main discussion, the different ways of achieving accountability will be identified in terms of preventing the risk of conducting accounting fraud. Prior to conclusion, the real-life case scenario that happened in Enron’s case will be provided to persuade the readers why accounting should not be considered the best way to increase the stakeholders’ accountability for violating accounting ethics. Accounting is not the Most Effective Way to Achieve Accountability within a Business Organization Specifically the accuracy of each company’s financial statement is very important since this type of financial report is considered by potential investors and creditors when making sensitive decisions as to whether or not to invest in the business and whether or not to grant the business some loans respectively (Eisen 2007, pp. 1 – 2; Young 2006). Despite the importance of financial statements when making important economic decisions, it is undeniable that registered accountants could easily manipulate the accuracy of the financial statements given that the registered accountant agreed to enter into collaboration with the business owners (Young 2006; McSweeney 1998). Based on a neutral, objective, and publicly accepted corporate values and ethics (Haller and Shore 2005, p. 18), Corporate governance is a system of authoritative direction related to the role and responsibilities of the business owners, the shareholders, the board of directors, and the chief executive officer (CEO) (Colley et al. 2005, p. 3). In line with this, corporate governance can be utilized as a policy within the business organization particularly when it comes to the actual structure of the board, the overall business performance, and the activism of the shareholders (Aguilera et al. 2008). Because of conflicting interest of the business owners, the shareholders, the board of directors, and the CEO, corporate governance is a sensitive and controversial issue when it comes to accounting and finance (Becht, Jekinson and Mayer 2005). Within a large-scale business organization, the shareholders are given the option to select and elect their preferred board of directors to act as their business representatives in terms of managing the business affairs. On the other hand, the board of directors are the ones who appoint, hire, and delegate the chief executive officer’s (CEOs) role and responsibility (Becht, Jekinson and Mayer 2005). Considering the fact that the CEO officially has the power to control and manage the daily business operations, the CEO is directly accountable not only to the board of directors but also the business owners. Even though the board of directors are responsible in balancing the monetary interests of the business owner(s), the profit-sharing of the workers, and other stakeholders by making important financial decision making (Cassill and Hill 2007), the CEO can be lured by the board of directors and business owners to convince the registered accountants to perform accounting fraud at the expense of the external shareholders and the rest of the stakeholders. As defined by Boland and Schultze (1996, p. 62), accountability is “the capacity and willingness to give explanations for conduct, stating how one has discharged one’s responsibilities, an explaining of conduct with a credible story of what happened, and a calculation and balancing of competing obligations which includes the moral ones”. It simply means that accountability in the field of accounting is referring to the actual process wherein registered accountants could satisfy the corporate stakeholders by protecting their interests against abusive business owners who are mostly after their own personal gains only (Collier 2003, p. 369). Given that there is a risk that financial statement can be manipulated by a registered accountant; accounting is never considered the most effective way to achieve accountability within a business organization. Corruption, which can take place in the form of bribery, the practice of accounting fraud or the act of manipulating the company’s financial documents (Dine 2008), and the practice of illegal and marginally legal offshore accounting methods, can occur within a private institution (Transparency International 2004) or performed by the public officials because of their desire to satisfy their personal interests (Klenig and Heffeman 2004, p. 4). In general, illegal business practices such as bribery, accounting fraud, and the use of illegal offshore accounting methods are examples of power abuse on the part of private and public officials (Transparency International 2004). In general, the business executives and non-executive directors of a large-scale company are responsible in making important business decisions based on the best interest of the business organization (Mallin 2007, p. 125). In line with this, there are many reasons why a business organization would decide to practice accounting frauds. Among the common reason why the business owners may lure accountants to manipulate the financial statement is for personal gain (Klenig and Heffeman 2004, p. 4; Collier 2003, p. 220). In line with this, accounting fraud can be performed either to attract the public investors to invest in the company, to convince the creditors to extend some bank loans for the business, or to avoid paying large amount of money on tax and duties to the government authorities (Singleton and Singleton 2010, p. 54). For this reasons, business entities that are already engaged in the practice of accounting fraud tend to hide the copy of their accurate financial statement to public investors. Different Ways of Achieving Accountability There are many ways wherein business and non-profit organizations can achieve accountability. To prevent registered accountants and the board of directors from practicing and developing a corrupt business culture, the CEO together with the chairman should develop and implement initiatives on corporate governance in order to create balance between the personal interests of the shareholders and the managers of the business enterprises (Solomon 2007, p. 80). By strengthening the corporate governance through the use of effective management and accounting control such as the hiring and firing of top management employees who are guilty of manipulating the corporate financial statement (Nordberg 20071; Romano 1996), the CEO can minimize the risk whereby the company could encounter financial fraud. To increase the readers’ understanding on how accountability within the business organization can be achieved, it is necessary for the general public to know that accounting and auditing are two different functions that is commonly used by private and government agencies in terms of solving financial problems. Basically, the active and fair participation of registered accountants and auditors are necessary to achieve sound corporate governance. As a common language in business, Eisen (2007, p. 1) described accounting is “the art of organizing, maintaining, recording, and analyzing financial activities”. In line with this, professionals who do accounting are the registered accountants. On the other hand, auditors are independent party who are made responsible in controlling and monitoring a company’s financial statement without the need to consider conflicting forces which is commonly present between the business owners and currently employed registered accountants (Pickett 2004, p. 3). As a way of preventing registered accountants from being tempted to perform unethical accounting practices, internal and external auditors should be present to ensure that accountability within a business organization can be achieved. To increase the assurance that the general public including the public investors are protected from registered accountants who are willing to accept bribery in exchange of performing unethical accounting practices, it is necessary on the part of internal and external auditors to create and implement a random double-checking procedure that will make the registered accountants trace any forms of accounting practices that are highly questionable within the business organization (Akin Gump Strauss Hauer & Feld LLP 2004, p. 17, 24). Eventually, registered accountants who are found guilty of unethical accounting practices should be held accountable for their own actions. Even though the stakeholders behind a business entity that practices accounting fraud would limit the information they submit to internal and external auditors, several past research studies mentioned that auditors can still have many ways on how they can effectively trace possible signs of accounting frauds (Beneish 1999; McSweeney 1998). In line with this, it is possible for internal and external auditors to strictly monitor the values of stock market variables, the quality of accruals, other variables that are non-financial by nature and the actual performance of the business enterprise (Dechow et al., 2007; Beneish 1999; McSweeney 1998). Manipulation of the financial statement can happen not only when a company would want to encourage the public investors to invest in the company but also for tax evasion purposes (Singleton and Singleton 2010, p. 54). In line with this, Chung, Firth and Kim (2002) explained that business enterprises that has large group of institutional shareholders are more likely to reduce the corporate earnings through the use of accruals. By decreasing the actual sales revenue, the busines enterprise is able to decrease the amount of taxes the company has to pay each year (Singleton and Singleton 2010, pp. 54 – 55). Therefore, it is necessary on the part of the internal and external auditors to closely monitor the actual sales of the company with its production output and total delivery of goods on a monthly basis. In most cases, a high level of short-term investors are highly connected with the under-weighting of its long-term expected earnings and over-weighting of the short-term expected earnings (Bushee 2001). For this reason, internal and external auditors are also strongly encouraged to carefully study the company’s long-term investments that are related to merger and acquisitions (Chen, Harford and Li 2007). Based on the evidences that can be gathered out of examining the company’s long-term investments and the use of accruals, Chen, Harford and Li (2007) revealed that it is possible that business enterprises that are practicing accounting fraud procedures could reflect high levels of short-term investments, institutional ownership and transient, and decreased levels of long-term loyal institutional ownership. Another way of tracing possible accounting fraud is to encourage internal and external auditors to look upon the company’s sudden increase in the annual revenues, unreasonable expense deferrals, revenues that are premature or accounts receivables that has not yet collected or will never be collected by the company, removal of actual financial liabilities, and the act of disclosing insufficient accounting information that is normally highlighted in the footnote of the company’s official financial statement (Akin Gump Strauss Hauer & Feld LLP 2004, p. 6; Ezzamel, Lilley and Willmott 2004). For instance: Company Z publicly announced that the company’s annual revenue for 2010 has reached £2.3 billion. Given that the auditors failed to trace any signs of continuous demand for the company’s product and services, internal and external auditors should immediately think about other non-business related factors that may have contributed to significantly increase the company’s annual revenue as compared to the previous year’s record. In line with this, it is possible that a bank has recently granted a bank loan to the company for business expansion purposes which will be implemented by early next year. The act of recording large figure of sales without any physical evidences that the company’s sales is really going up is already a clear sign of dishonesty on the part of the registered accountants. Among the best and most effective way to verify the company’s sales and revenue is for internal and external auditors to go through signs of possible customer complaints, observing the actual in and out of the company’s raw materials, inventory levels, the day-to-day production output, and actual delivery of finish products on a daily basis (Akin Gump Strauss Hauer & Feld LLP 2004, p. 8). Discussion Other than identifying and implementing the corporate goals, development of business plans to enable the company meet its business objectives, and implement organizational policies that are designed to support the business objectives (Mallin 2007, p. 124), the roles and responsibility of the board of directors is to control the daily business operations, resource acquisitions, and improve the business services (Carpernter 1988). In line with this, it is important to note that executive directors are the ones who are actively involved in the daily operations of a company whereas the non-executive directors including the outside board of directors are not involved in the daily operations of a company. Since non-executive directors are not engaged in the daily operations of a company, the Commission revealed that the modern company law requires a collective responsibility with regards to monitoring the financial and non-financial information of the business throughout the European Union (European Commission 2003). In order to reduce the possible conflict of interest between the shareholders, the executive board of directors, and the rest of the management employees (Solomon 2007, p. 82 & 92), the non-executive directors should be able to get direct access to the actual business information even though this group of directors are not directly involved in the daily business operations of a company (Waldo 1985, p. 5). Knowing that the non-executive directors are inactive in the daily operations of the business, this group of individuals are highly qualified to perform the following tasks: (1) do a close monitoring with regards to the business, ethical, and legal performance and policies; (2) examine the business choices and implementation methods utilized by the executive directors; (3) examine the process of appointment and removal of senior managers; and (4) giving solicited advice with regards to the business strategies that could enable the company reach its corporate goals and business objectives (Solomon 2007, p. 82; Carpernter 1988).2 In line with this, the non-executive directors will be able to make executive directors think twice before they start abusing their authoritative power by controlling the corporate financial statement. As a result, the non-executive directors will be able to improve the accountability of the shareholders, executive directors, and the public investors (Mallin 2007, p. 132; Solomon 2007, p. 88). Due to the fact that the shareholders are the business owners of a company, this group of people have the authoritative power to instruct registered accountants to control legal or illegal business transactions (Romano 1996). To increase accountability within the business organization, the executive directors should take advantage of their rights to look through the company’s official documents in order to trace potential accounting fraud. As part of examining the corporate financial statement, executive shareholders should look for possible signs of unusual business records that will negatively affect the long-term business success of the company. Sensitive issues like this can be consulted with the non-executive directors to avoid coming up with unnecessary bias judgment. Shareholders are the ones who appoint and vote for them to stay on the position as the board of directors. For this reason, the board of directors is most likely to protect the self interest of the business owners at the expense of their employees, a large group of suppliers, the government and public investors, and the creditors (Beresford 2005; Saver 2004; Daily and Dalton 1993). Considering the case of Enron, it is clear that the actual accounting practices of a business organization can be contradictory to what corporate governance informs us with regards to the actual role of the executive and non-executive directors within a business organization. By controlling the company’s financial record, Enron’s case is unique in the sense that a large group of directors decided to participate in the global scam (Kim and Nofsinger 2006, pp. 52 – 53; Davis 2005). In line with this, Enron was noted for keeping the company’s actual financial liabilities and obligations away from the public investors. As a result of cashing in of $1.1 billion Enron’s shares while stock prices was high, employees who invested their 401(k) retirement plan in Enron shares, a large group of small investors, and the creditors suffered serious economic loses because of the business fraud (Chartier 2008; Wayne 2002). Because of the Enron’s case, a lot of controversial issues came up with regards to the professional ethics concerning practice of accounting and auditing as a profession. Since the absence of effective external auditors could entice some of the highly paid accountants to manipulate the company’s financial statement, several research studies suggest that the best way to avoid incidence of accounting fraud is to encourage the institutional investors to act as internal or external auditors to ensure that each of the highly paid accountants will accurately record the company’s true earnings and liabilities (Chen, Harford and Li 2007; Chung, Firth and Kim 2002). Conclusion and Recommendations Accounting is not the most effective means of achieving accountability in organizations because of the fact that accounting can be manipulated by corrupt individuals. In general, accounting fraud can take place because of the absence internal and external control like the anti-fraud programs or other accounting-related activities such as fraud investigation or anti-fraud controls (Singleton and Singleton 2010, p. 54). As a rule, it is better for business enterprises to have weak internal and external accounting control as compared to not having any control at all. Aside from the absence of effective accounting monitoring, one of the reasons why accounting fraud takes place is because of the failure of the top management to create a working environment that is free from conflict of interest, kickbacks, bid rigging, and bribery (Singleton and Singleton 2010, p. 57). To achieve accountability within a business organization, it is necessary to establish a good board by implementing two-tier board structure instead of unitary board structure3. Basically, the two-tier or dual board structure is composed of executive directors who manages the business operations, a chief executive who monitors the business performance of executive directors, and a group of non-executive directors who sits as the supervisory board should be assigned to develop business strategies on behalf of the company (Mallin 2007, p. 122; Kim and Nofsinger 2006, pp. 51 – 53). With this kind of business structure, it is easier to prevent and avoid corrupt business practices. *** End *** References Aguilera, R., Filatotchev, I., Gospel, H., and Jackson, G., 2008. An Organizational Approach to Comparative Corporate Governance: Costs, Contingencies, and Complementarities. Organization Science , 19(3), pp. 475-492. Akin Gump Strauss Hauer & Feld LLP, 2004. How to Detect, Prevent and Litigate Accounting Fraud. [online] Available at: [Accessed 21 December 2010]. Becht, M., Jekinson, T., and Mayer, C., 2005. Corporate Governance: An Assessment. 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