PART FORM ANU AUSTRALIAN UNIVERSITY :
Enron, Parmalat, WorldCom, HIH – these corporate failures and accounting scandals have shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets. There has also been public disquiet about the role professional auditors and audit firms have played in these corporate scandals. The consequences for many of the players in the market for financial information have been enormous; reputations both of key individuals and organisations are in ruins, jobs have been lost, and pension funds have been wiped out. The damage, both economic and social, has been incalculable, and the implications are far-reaching for corporate management, company directors, audit firms and the investing public. An array of factors contributed to these events, but one thing is for certain – the billions of dollars in corporate value lost was due in significant part to unscrupulous management and boards of directors that failed to meet their responsibilities. The accounting profession, including auditors, also played a major role in these events. While the story behind these corporate failures is always complex, a lack of ethical behaviour by many individuals is a big part of it. For the audit profession, these developments have again highlighted the gap between public expectations and the reality of the role of the auditor. With Enron in particular, the public perception was that the auditor should have acted as a control on unscrupulous management practices. The conclusion reached by many members of the public (and parliamentarians) was that the auditors failed in this responsibility because their independence from the management of Enron was compromised. While it is by no means as simple as that, the audit profession must acknowledge and address these types of perceptions, or indeed facts, if it is to restore trust in both the capital markets and itself. The biggest challenge ahead for auditors is to identify how ethical behaviour can be – and be seen to be – restored, as it is this that will be the basis for the reconstruction of public trust in the profession and in the practice of auditing. This book does not purport to provide all the answers, but it highlights the importance of ethics and provides some thought-provoking commentary on the means in which ethical behaviour can be embedded in our personal and professional culture – one of the essential components to restoring public trust. The response: regulation, regulation, regulation …
The response of governments worldwide to corporate scandals has been greater regulation. This response is often taken in the name of supporting the need for protecting the public’s interest. Attention has been focused on flaws in the capital market and reforms to corporate reporting and accounting/auditing that may rectify them. Stock exchanges, global and local accounting and auditing standard-setters, institutional investors and other stakeholders have called for transparency and accountability in corporate governance, business ethics and corporate reporting. New laws and best practice guidance require strict monitoring of auditor independence, codes of ethical conduct, more disclosures, and CEO/CFO certification of various key statements in corporate reports. The aim of these requirements is to ensure effective checks and balances are in place so that good corporate governance and business ethics are observed. References
DiPiazza, S. A., Jr. & Eccles, R. G. 2002, Building Public Trust – The Future of Corporate Reporting, John Wiley & Sons, New York. PricewaterhouseCoopers (US) 2003, Governance, Business Ethics and Compliance – What Works Best (unpublished article).
Why regulation isn’t the only answer
Regulation alone will not regain public trust. Confidence in the capital markets depends on confidence that the reporting and regulatory process will deliver...
References: Albrecht, W. S. 1992, Ethical Issues in the Practice of Accounting, South-Western Publishing, Cincinnati, OH.
Duska, R. F. & Duska, B. S. 2003, Accounting Ethics, Basil Blackwell, Oxford.
Hare, R. M. 1981, Moral Reasoning, Clarendon, Oxford.
HIH Royal Commission 2003, The Failure of HIH Insurance, Commonwealth of Australia, Canberra
Kant, I. 1953, ‘The Moral Law’, in H. J. Paton (trans.), Groundwork of the Metaphysic of Morals, Hutchinson, London.
McBarnet, D. & Whelan, C. 1999, Creative Accounting and the Cross-Eyed Javelin Thrower, John Wiley & Sons, Chichester.
Mill, J. S. 1910 (1861), ‘On Liberty’, in A. D. Lindsay (ed.), Utilitarianism, Liberty, Representative Government, Dent, London, pp. 65-170.
Smart, J. C. C. & Williams, B. 1973, Utilitarianism: For and Against, Cambridge University Press.
IMA. (1997). Statements on Management Accounting: Objectives of Management Accounting, Statement No. 1B. New York: Institute of Management Accountants.
IIA Code of Ethics. (1988). Altamonte Springs, FL: Institute of Internal Auditors
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