Lessons from Ethical Violations in Public Accounting

Public accounting is a field faced with ethical issues similar to any area of practice. Unethical practices in accounting are often motivated by management greed, incentives, bonus, management pressure, and more. These practices only lead to short-term gains (Finn, Chonko & Hunt, 1988). The long-term impacts are usually negative consequences. Ethical behavior and practices are critical aspects of good accounting. Accounting regulations and rules exist to ensure that users stay objective as they make decisions by utilizing accurate financial statements at the end of business operations and practices. The AICPA is the primary body that guides accountants in the public sector. The IIA and the IMA govern accountants and auditors in the private sector. This paper is a case study of a South African firm involved in a scandal due to ethical violations, and the impacts of the negative publicity were detrimental. The case study and a report compiled on the relevant findings will examine various ethical issues and challenges.

Forms of Ethical violations (Money Laundering)

Ethical violations take various forms, including fraudulent practices, improper management of records, and violation of federal and state laws that can be manifested in multiple practices. Such practices include money laundering. Money laundering is an illegal practice used by criminals to hide their illegal income sources from the prying eyes of the law. It is one of the most organized criminal activities in the world. With money laundering, illegal money is acquired and turned into legal money and tenders. Large organizations usually result in money laundering if they engage in organized criminal practices that result in large quantities of cash that cause the authority to question their activities. As a result, they seek ways of concealing this money to avoid attracting the attention of legal authorities. Money laundering occurs in three stages, namely, placement, layering, and integration. Placement involves placing the dirty money into the legal systems through activities such as blending of legal and illegal funds and invoice fraud, which involves techniques such as under-invoicing and over-invoicing, and fraudulent documentation. It can also be done through smurfing, breaking the large illegal quantities of money into smaller, less suspicious transactions, offshore accounts that involve hiding dirty cash in foreign accounts to evade tax payment, and aborted transactions.

The next stage of money laundering is layering which generally involves transactions that move the illegally-earned money into the legal, financial system, usually through offshore techniques, making it difficult for the authority to detect the activity, and can be done through investing in shell companies or real estate, converting the money into stocks, and moving money into offshore accounts. The final stage is integration which is ideally the absorbing of the money into the economy. The cash is integrated back into the legal systems as legal tenders through investments into high-end cars, artwork, property markets, jewelry, and other highly-priced commodities. Looking at this specific case study, in exhibits 3 and 4, money laundering occurred following these three stages (Holtzblatt, Foltin & Tschakert, 2020). The government granted Estina, a subsidiary connected to the Gupta family, the contract to be part of the Verde Dairy project without outing the project for bidding. The state government provided the company with 84 million rands to complete the projects first year. The money was later transferred to an offshore account in Dubai into a Gupta-controlled UAE shell company called Gateway Limited.

Then, about 75 percent of that money was then sent back to two subsidiaries of the Gupta business empire in South Africa and included the money that paid for the luxurious Gupta wedding. The invoices show that a substantial amount was spent at the Sun City celebrations totaling 30 million rands (USD 3,333,400), an amount significantly different from the one initially presented for the wedding celebrations, equivalent to USD 15,811. From these figures, there is evidence of foul play that involved concerting illegally acquired money to an offshore account in Dubai, to a subsidiary of the Gupta family, and wiring the money back to two other subsidiaries, including paying for the wedding. Eventually, the family turned the state money into their legitimate assets.

The KMPG SA was also involved in this laundering scheme by disregarding the 30 million rands set aside for the dairy farm but funding the luxurious Gupta wedding. Also, a subsidiary of the Gupta Empire, Linkway Trade, involved in the laundering scheme was a client of the KPMG and was the company that managed and paid for the wedding celebrations in which foul play was evident, especially after recording the celebration as a business expense. Additionally, the firm failed to pay income tax, a practice that the KPMG SA did not question. Hence, the KPMG SA audit of the company was short of the expected quality as reported by KPMG International. The auditing firm was found to have violated several ethical codes of accounting. Moreover, IRBA and SAICA concluded that it was negligent of the operations surrounding the Gupta money laundering and the failure of the president of the KPMG SA to be responsible for the failed duties of the auditing firm.

Reputational Damage by the KPMG

Reputation and public trust in the judgments of an auditing firm are crucial in substantiating the functions of an auditor and other value-added services that lend credibility to various published financial audits or reports. A good reputation and public trust encourage and drive an auditing company to conduct transparent accounting practices and reports that the stakeholders can easily understand, including clients. This allows them to trust the eligibility of the information they receive and could lead to more potential investments and business dealings hence a consistent flow of income for the auditing firm. Any financial restatement, especially by a high profile company such as KPMG, caused by fraudulent practices regarding the financial statement erodes te confidence of the public in financial reports and any related audit function. When such an experience as the one encountered by KPMG about the SA auditing scandal happens, it becomes crucial to restoring public confidence. However, because of the dealings that have resulted in negative publicity because of the practices of the auditing firm, it may be challenging to restore the companys reputation. However, it is not entirely impossible. It requires significant efforts by every stakeholder, including the accounting profession, the business community, standard-setting bodies, regulators, and legislators.

After the scandal, KPMA took several responsive measures to restore its lost glory, reputation, and trust in its South African Affiliate. The first step was making changes in the leadership of KPMG SA. Nhlamu Dlomu was selected to replace the former president, Mr. Wessels. The company believed she was well qualified and experienced to take back KPMG SA to quality auditing and financial reports while upholding the ethical standards. Her first step was to build a management team committed to maintaining ethical conduct and integrity to ensure high-quality service and stability to their clients. She also saw the appointment of a partner to act as a risk management partner to improve risk management and improved quality. The firm also took steps to enhance the processes of its corporate governance that included the adoption of recommendations and the appointment of a senior, non-executive, and independent director to complement the duties of the existing board members to assist the leadership team in achieving its goals of restoring the publics trust. Also, KPMG International has been committed to supporting KPMG SA to rebuild itself after the scandals by supporting it in every way possible. KPMG SA has capitalized on the expertise of the global leaders of KPMG and specialists working in unison to restore its reputation. This has been a significant aspect of the KPMG SA recovery journey (Holtzblatt, Foltin & Tschakert, 2020).

While a change in leadership is the first and the best strategy to restore the firms reputation and public trust, this strategy alone is not enough. More affirmative actions can still be taken to enhance the restoration of its reputation. For instance, the firms marketing team can launch a campaign to win back public trust again and attract new investors and clients, especially after losing so many clients due to the scandal. The campaigns can be done periodically, with each subsequent campaign highlighting some of the key achievements the company has achieved from the previous campaign. This should allow the public to see the firms efforts to improve the quality of its services and how successful they are. The firm can also engage in a customer win-back program designed by the marketing team with the support of the management. This should allow the firm to win back its lost clients. This strategy has been proven to be cost-effective yet efficient. Other activities include employee motivation and strategy to build mutual trust between the management and the employees. A good relationship between the two should speed up the recovery process because a good working relationship generally improves the quality of service provided.

Professional Skepticism and its Role

This is an attitude that involves a questioning mind and a thorough assessment of audit evidence. The auditor should use the skill, knowledge, and ability required by the public accounting profession to perform tasks diligently, with integrity, and in good faith, and gather and practice objective evaluation of...

As a result of the malpractice, the accounting firm received criticism from the public and other nations abroad. Although it paid the penalty totaling 950,000 dollars without denying or admitting the charges, its publicity was still affected. This resulted in some of its investors leaving the group and resulted in losses. The firm was criticized for failing to practice honesty and integrity in its dealings and causing feelings of distrust from its investors that saw most of them leave. The firm also faced criticism from other nations abroad mainly because more than one group subsidiary had engaged in the same violation, including the firm affiliate in Australia. To remedy the situation, the firm implemented several measures. The first was to implement management change by changing the leadership of the RSM US. This came with more plans to reverse the damage and policies to improve the quality of service. The company also went on a campaign mission to restore its reputation and prevent more drop-outs by its clients.

Integrated Reports

An integrated report refers to precise communication regarding how an organizations prospects, performance, governance, and strategy are integrated to generate value over every period, the short term and long term periods. Generally, an integrated report represents the firms performance in terms of financial information and any other relevant information. It offers a greater context for data on performance. It establishes a clear picture of how valuable information can be utilized or fitted into the business operations and makes the decision-making process long-term. Usually, the information communicated on an integrated report aims to benefit stakeholders more and enhance financial or capital allocation decisions. This helps to complete the sustainability and financial reports for various firms. The primary purpose of the integrated reports is to explain to stakeholders how the organization expects to create value over time. It also seeks to elaborate on how a firm interacts with its external environment. In response to the detrimental impacts left by the scandal on KPMG SA, the firm formulated an integrated report about various issues. The first-ever integrated report for the firm was created on March 7th, 2019, under the title Rebuilding Trust, Redefining Profesionalism. The integrated report was 45 pages long and was prepared based on the guidelines stipulated by the International Integrated Reporting Council (IIRC).

This report was designed to reflect KPMG SAs intention to be a transparent and accountable organization whose primary focus is to create value for all stakeholders affiliated with the firm. The report was also formulated to account for its changes and review its performance towards achieving its objectives and goals. In my opinion, this was an excellent step to take towards rebuilding the lost trust from the public and investors and would go a long way in helping the company achieve its goals as stipulated by the title of the report; to rebuild trust and redefine professionalism. Creating and issuing integrated reports by the firm would provide stakeholders, investors, and the public an opportunity to monitor their progress and assess their efforts of achieving their goals. The reports would also allow the mentioned parties to see how much progress the firm has made since the scandal. This would help rebuild the companys reputation, especially because putting the information out for the public to see would be considered by many as the first step towards integrity and honesty. These two values are the basis for trust. Therefore, I recommend that the company publishes and issues its integrated reports annually to help them win back the trust of the stakeholders and public.

Conclusion

The case study has provided me with an opportunity to examine ethical challenges and issues encountered in public accounting using the real-life scenario of the KPMG SA and Gupta family business scandal and the consequences that the KPMG had to bear as a result. This case studys main challenges and issues are unethical behaviors and widespread corruption in the public accounting profession. The significant impacts of these issues include negative publicity, loss of revenue due to the loss of clients, and significant reputational damage. The case study has also shed light on some of the practices that can be implemented to remedy the situation once it occurs. However, the case study has brought out a precise point; that it would be better for an auditing firm to engage in activities such as client acceptance and continuance analysis to understand better the clients they are in business with. This helps a firm to prepare itself adequately through risk management strategies. All in all, accounting auditors must uphold integrity in their dealings and operate following the guidelines stipulated by the ethical…