Accountability When Do We Hold the Accountants

Accountability

When do we hold the accountants accountable?

In the wake of accounting scandals at Enron and WorldCom, the question arose: how to hold accountants accountable, when it is they who are supposed to be the objective determinants of a firm's financial ethics? Merely having to 'sign off' on an audit was not enough to ensure that the accountants at firms as reputable as Arthur Anderson adhered to GAAP (Chartier 2002). The need for ethical accounting is vital to ensure that companies act with all due transparency: "Accounting fraud usually occurs when a company overstates its assets or revenue, or understates its liabilities and expenses. Companies feel the pressure to commit such acts because the market reaction can be harsh for companies if their revenue projections do not match actual earnings. In addition, senior corporate officials' compensation packages may be directly tied to hitting targeted earnings. Thus, this creates an insatiable need to ensure that the corporate earnings projections are precisely hit" (Tinker 2011).

Given the strong financial interests that managers have to 'look the other way' when fraud is committed, or to outright condone it, accountants must be the final barricades against such malfeasance. When senior management's salaries are yoked to the financial performance of the firm, this, statistically speaking, increases the likelihood of fraud. Financial statement fraud cases caused more than $4 million dollars in losses in 2012 (Tinker 2011). Additionally, private companies are not governed by the provisions of Sarbanes-Oxley or the standards of the Public Company Accounting Oversight Board (PCAOB) so some companies are even less 'accountable' for potential abuses than others.

For companies that are affected by SOX, "which establishes corporate and criminal fraud accountability for certain willful violations" of accountants, "third-party claims may require evidence of fact-specific conduct and relationships between the third party and the accountant or auditor" (Smith 2002). Examples of SOX violations are when the accountants stand to benefit in a material fashion from their findings; the extent of the omissions and whether the violations are intentional or reckless (Smith 2003)

To guard against fraudulent reporting, management can set a tone for all employees, including accountants, to follow. The best policy is preventing fraud before it takes place through the vigilance and the zero tolerance policy of the firm itself: "management should send a clear message that fraud for whatever reason is unacceptable by establishing strict controls over financial reporting. Management must also do their part by eliminating obstacles and constraints that could pressure the accounting personnel into committing a fraudulent act, such as setting unachievable goals" or tying pay and bonuses solely to performance (Tinker 2011).