Page 416 - Introduction to Business

390 PART 4 Accounting

Effective and efficient functioning of the global marketplace requires uniformity
in accounting and auditing standards. At this time, businesspeople, financiers, and
investors must take into consideration the differences that exist. Such differences
substantially curtail the development of international business activity. Harmoniza-
tion of standards has the potential of benefiting economic activity around the globe.

reality How do people around the world benefit from international accounting
CH ECK standards?

Importance of Ethical Accounting Practices

LEARNING OBJECTIVE 4
Discuss the importance of ethical accounting practices.
Ethical accounting practices are a key component of a country’s economy. In general,
ethical behavior is necessary to build trust. Trust is an essential ingredient for eco-
nomic activity to occur. Without trust that a product will work, who would buy it?
Without trust that an employer will pay employees for their work, who would go to
work? Without trust that the accounting information in financial statements is reli-
able, who would invest in a company’s stock? Without trust that the accounting
information in financial statements is reliable, who would loan money to a company?
Enron employees move out If accountants fail to do their jobs in an ethical manner, then investors are neg-
personal items after the energy atively affected. How can investors make sound investment decisions if accounting
company declared bankruptcy.
information in company financial statements is unreliable?
Without reliable accounting information, determining the
value of a company’s stock is virtually impossible. This was
a major reason that the stock market declined in 2001 and
2002. Investor confidence was shaken by corporate scandals
and questionable accounting practices at firms such as
Enron, Global Crossing, and WorldCom. Investors were
uncertain as to how reliable any company’s financial state-
ments were.
In the case of Enron, the company created limited part-
nerships allegedly for the purpose of reducing liabilities. In
this way, the company was able to shift assets and boost
profits, at least in the short run. Many people were given a
false impression of the company’s financial situation. Using
accounting information to mislead people is a violation of
generally accepted accounting principles. Ultimately, the
courts were called on to decide the guilt or innocence of
persons charged with fraud and other crimes. Former CEO
of Enron Jeffrey Skilling became a defendant in a lawsuit
alleging he knowingly endorsed deceptive and misleading
financial statements. In February 2004, the former CEO was
indicted on 35 counts of fraud, conspiracy, filing false state-
ments to auditors, and insider trading.
To help restore investor confidence after Enron and
other financial scandals, the U.S. Congress passed the
Sarbanes-Oxley Act in July 2002. The new law increased
prison sentences for fraud and established the Public Com-
pany Accounting Oversight Board to oversee auditors of

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