Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

AN URGENT NEED OF ETHICAL EDUCATION FOR ACCOUNTANTS AND AUDITORS IN Paper Recceived : 8th Aug 2017 Paper Accepted : 20th Aug 2017 Paper Published : 30th Aug 2017 Reviewers : Dr.Rambabu Gopisetti Dr.M.Mohamed

Dr.M. RAMACHANDRA GOWDA Mrs.S.R. MADHAVI Professor and Coordinator-MFA & MTTM Research Scholar Department of Commerce Department of Commerce Bangalore University Bangalore University Bangalore. Bangalore.

Abstract Auditors and Accountants in India to mitigate Corporate Scandals. For the purpose of study secondary data has Globalization leads to Social, political and been collected, processed and presented in the form of technological changes have challenged traditional idea of tables, figures and Interpreted accordingly.. professional practice by accountants and auditors. Ethics is a code or moral system provides criteria for evaluating Keywords— Ethics, Auditors, Accountants, Corporate right and wrong. Scams, Ethical Education.

The high standard of ethical behavior is expected from I. INTRODUCTION Professional like Accountants and Auditors. From two In competitive corporate world accounting and decades lot of Corporate scams noticed in India Bofors Scam, , World Com scam, Tyco scandal, auditing profession is extremely important to be Telgi Scam, The Hawala Scandal, Harshad Mehta &Ketan ethical in their practices due to the very nature of Parekh Stock Market Scam, Health south scandal, Freddie their profession. The Professionals should maintain Mac scandal, American International Group scandal confidence of clients and ethical conduct. Ensuring (AIG), Lehman brothers scandal, scandal, highest ethical standards is important to a public Satyam scandal, 2G Spectrum Scam, the UTI scam, C.R. accountant as well as to an accountant in business. Bhansali scam, Madhu Cora scam, Indian Coal Allocation Both public accountants and accountants in business Scam, Wakf Board Land Scam, Commonwealth Games are in a fiduciary relationship, former with the client Scam and The appears that corporate and latter with the employer. In such a relationship, accounting fraud is a major problem that is increasing both in its frequency and severity. they have the responsibility to ensure that their duties are performed in conformity with the ethical values of The Primary cause of all frauds started from honesty, integrity, objectivity, due care, Accountants and Auditors as failure ofIt4fgcorporate confidentiality, and the commitment to the public governance. Initially start out small with the perpetrator interest before one‗s own. The recent fall of the thinking that small changes here and there would not make a big difference but eventually growing in two million white company SATYAM and the role played by its Elephant in the room. In this context a need has been long Auditor and auditing committee, has buzzed an alarm felt to Study an Urgent need of Ethical Education for in the Indian capital market. It has resulted into

Emperor International Journal of Finance and Management Research [EIJFMR] Page 64

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813 shaking the confidence of the public investing in the had taken place in the world affecting the credibility stock market. It has led to drastic declines in share of the accounting profession. These corporate prices and substantial financial losses to minor scandals have placed in doubt the effectiveness of shareholders. Both public and experts have contemporary accounting, auditing and corporate acknowledged primary cause of these scandals as governance practices, for which accountants are failure of corporate governance. In recent years, fraud responsible. Thus, the ethical code of conduct is has emerged as one of the biggest areas of not just closely linked with the accounting and auditing financial loss for companies and banks resulting in profession. Hence, we can say that the ethics has billions of dollars of loss worldwide, but also a loss become an essential part for accountants and audit of data and reputational brand image. Overall damage professionals. The ethics of a business is currently a and loss due to fraud can be staggering. But in most important issue owing to sensational corporate today‘s technology-enabled world of business, scandals that had taken place in many countries auditors are progressively relying on technology to which are damaging to the economy and society. assist them in with auditing functions and auditor These corporate scandals question the morality of skills, their effective use of dimensions of businessmen in general and accountants in particular. technology, professional skills with ethical standards, The accountants and auditors are the main code of conduct in automated and novel methods of contributors in ethical standards of a business. These fraud mitigation or reduce or abuse the incidental scandals raised in the recent times were situations of corporate scandals in present business characteristics of deeper problems and identified that world. improvement of ethical standards, adequacy of financial management, reporting mechanisms, audit Professional Ethics is a comprehensive issue quality and strengthening of governance regimes as covering all aspects of business or profession. means to improve public confidence in financial Accounting includes accounting services and is one reporting. The accounting profession has a of the jobs based on discipline in the world. This responsibility towards these areas, whose deficiencies profession is associated with one of the issues of have led to corporate scandals and collapses. In this people in the society, property and assets of people. perspective a need has been long felt to Study Ethical principles or ethics are defined in a set of Importance of Imparting Ethical Education to spiritual values and principles. All of us have such set Auditors and Accountants is need of the hour in India of values although we don‘t know anything about to mitigate Corporate Scandals. . them. If accountants and auditors working in business environment are not dependent upon professional II. REVIEW OF LITERATURE ethics, it has harmful effect for those trusting them. Sarıoğlu (2002) Enron case observed in America in Thus, accounting professional ethics is of great 2001 and non-ethical operations of Arthur Andersen importance for accountants and professional auditors being one of the 5 biggest independent inspection and those involved in auditing and accounting. The companies in the world known to approve all non- professional ethics and its implications on role of ethical accounting transactions of this company and accounting professionals and important issues in even suggest itself have shown that ethical problems accounting and auditing. Ethics has become a most about the accounting profession recently should be topical issue of concern in accounting and auditing at examined again. present owing to the series of corporate scandals that

Emperor International Journal of Finance and Management Research [EIJFMR] Page 65

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

Kırlıoğlu and Akyel(200430) Xerox, Dynegy, Scope of the Study WorldCom, Global Crossing, , The study has been confined only to need of Qwest Communications and Adelphia Imparting Ethical Education to Accountants and Communications cases observed in America are Auditors for Mitigating Corporate Scandals in India. among the examples to be given for ethical problems To give suitable Suggestions to overcome the about the accounting profession. loopholes in the Auditing Policies. The corporate scandals from 1990 to 2015 have been taken for Özkol et al (2005) Professional ethics notion, used in detailed Investigation. the meaning of acting as depending on ethical and Significance of the Study professional principles in the profession and related The New Government an urge of attracting more activities, is a matter which should be paid attention Foreign Direct Investments and encouraging Foreign in terms of that profession‘s gaining respect and trust Institutional Investors to come and invest in New from that society. Government Schemes like Smart city Projects, Make In India. It Increases Employment Opportunities, Özbirecikli (2009)Researched the progress which Improve Revenue Productivity, Increase Capital educational levels of members of accounting Formation, Contribution to GDP, Economic Growth profession follow from 1992 to 2009 in these studies. and Economic Development. From two decades lot of Following the research, he predicted that the corporate scams noticed in India like Bofors Scam, educational levels of members of profession will Enron scandal, World Com scam to 2G Spectrum increase more due to the obligation for being a Scam, the UTI scam, Commonwealth Games Scam faculty graduate at least which has been brought and The Fodder Scam appears that corporate today when it increases in periods with legal accounting fraud is a major problem that is increasing amendments generally. both in its frequency and severity. Therefore need has Kısakürek and Alpan (2010) measured the reasons been long felt to Study an Urgent need of Ethical for obeying the occupational ethical rules, causes of Education for Auditors and Accountants in India to non-ethical behaviours and opinions about the ethics mitigate Corporate Scandals in India. of members of accounting profession. According to Research Methodology study results, the reasons why members of accounting The research methodology used for the study is profession in city of Sivas obey with the occupational Descriptive and Analytical to be followed in research ethical rules are determined as societal pressure, the activity starting from investigation to presentation. It level of education received, supervision level of trade includes the research design, the Sources of data, the association, penal sanctions and conscientious collection of data and the framework of analysis. sanctions. Major Corporate Scandals in India Objectives of the Study 1. Waste Management Scandal (1998) 1. To Study the various Corporate Scandals in  Company Houston-Based public India company 2. To understand the need of Ethical Education  What Happened $1.7 Billion in fake for Accountants and Auditors in India. earnings

Emperor International Journal of Finance and Management Research [EIJFMR] Page 66

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

 How they did it Falsely increased  How they did it Siphoned money through depreciation time length for fixed assets unapproved loans, fraudulent stock sales, on balance sheets Money smuggled out of company as  Main Players CEO, Top Executives, and benefits. Arthur Andersen Company (Auditors)  Main players CEO Dennis Kozlowski &  Penalties Fined Arthur Andersen Former CFO Mark Swartz Company (Auditors) $ 7million.  PenaltiesCEO,CFO were got 8-25 years in 2. Enron corp.(2001) prison, & lawsuit forced Tyco to pay  Company Houston-Based Commodities, & $2.92billion to investors. Service Corporations. 5. Health South Scandal (2003)  What happened Shareholders lost $ 74  Company U.S based largest public health Billion, 1000 Employees lost their care company retirement accounts as well as jobs  What happened Earnings numbers were  How they did it Keep huge debts off inflated $1.4billion to meet stockholder balance sheets expectations  Main players CEO Jeff Skilling and Former  How he did it Allegedly told underlings to CEO Ken Lay, Arthur Andersen make up numbers & transactions from 1996-  Penalties Lay died & skilling got 24 years 2003 prison, Arthur found guilty for fudging  Main players CEO Richard Scrushy accounts.  Penalties He was acquitted of all 36 counts 3. WorldCom Scandal (2002) of fraud & convicted of bribing to governor  Company Telecommunications company, of Alabama leading to 7years prison. Now MCI. Inc 6. Freddie Mac Scandal (2003)  What happened Inflated assets $11 billion,  Company Federally backed mortgage lost 30,000 jobs & $180 billion losses to financing giant investors?  What happened $5 billion in earnings were  How they did it Underreported line costs by misstated capitalizing rather than expenses & inflated  How they did it Intentionally misstated, revenues with accounting practices understated earnings in books  Main Players CEO Bernie Ebbers  Main players President, CEO, Ex-CFO,  Penalties CFO was fired, controller Former senior VPs. resigned, CEO sentenced for 25 years for  Penalties $125 million in fines & the firing fraud, filing false documents. of president, CEO, Ex-CFO. 4. Tyco scandal (2002)  Company New jersey-based blue-chips 7. American International Group Scandal (2005) Swiss security systems  Company Multinational insurance  What happened CEO & CFO stole $ 150 corporation million & inflated company income by $  What happened Massive accounting fraud 500 million $3.9 billion, bid-rigging & stock price manipulation

Emperor International Journal of Finance and Management Research [EIJFMR] Page 67

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

 How he did it Allegedly booked loans as  What happened Falsely boosted revenue by revenues, & told traders to inflate AIG stock $1.5 billion price  How they did it Falsified revenues, margins  Main players CEO Hank Greenberg & cash balances to the tune of 50 billion  Penalties Settled with SEC $10 million in rupees. 2003, $1.64 billion in 2006 with PFs CEO  Main players Founder RamalingaRaju, his was fired but faced no criminal charges. brother & Price water House auditor  PenaltiesRaju& his brother charged with 8.Lehman Brothers Scandal (2008) breach of trust, conspiracy, cheating &  Company Global financial services firm falsification of records. Released after CBI  What happenedHid over $50 billion in failed to file charges on time. loans disguised as sales  How they did it Created impression Scams and Loss Scams and Frauds Loss Frauds Suffered Suffered Lehman had $ 50 billion more cash & $ 50 (Amount) (Amount) billion less in toxic assets than it really did Stock Exchange Rs. 5,000 Satyam Scam(2008) Rs. it. Scam Crore 10000 (Harshad Crore  Main players Lehman executives, Company Mehta)1991 Fodder Scam Rs. 950 2G Spectrum Scam Rs.1750 Auditors & Ernst & Young (CharaGhotala) Crore (2008) 00 Crore  Penalties Forced into largest bankruptcy in 1992 C. R. Bhansali Rs. 1,200 Madhu Cora Scam US history &Did not prosecute due to lack Scam (1995) Crore (2009) Rs.4,000 Crore of evidence. Stock Exchange Rs. 1,250 Common Wealth Rs.2,342 Scam Crore Games Scam (2010) Crore (Ketan 9.Bernie Madoff Scandal (2008) Parekh)2001 The UTI Scam Rs.4,800 Coal Black Rs.1,856  Company Wall street investment firm (2001) Crore Allocation Billion Scam(2012)  What happened Tricked investors out of UP food Grains Rs.35,000 Karnataka Wakf Rs.20,00 Scam(2003) Crore Board Land Scam 0 Crore $64.8 billion through the largest Ponzi (2012) scheme SourceGini. A.(2005). Case studies in ( 5th Edition)

 How they did it Investors were paid returns Anticipated causes for conceding ethics in out of their own money & other investors accounting rather than from profits Unethical Pressure from the Management  Main players Bernie Madoff, His In the era of cut-throat competition and the accountant, David friehling& frank burden upon public companies to succeed at high dipascalli levels may place undue stress and pressure on  Penalties150 years in prison for Madoff plus accountants who then manipulates Balance Sheets $170 billion restitution. Friehling& frank got and financial statements. The ethical issue for these prison. accountants becomes maintaining true reporting of

10.Satyam Scandal (2009) company assets, liabilities and profits without giving  Company Indian IT Services Back-office in to the pressure Unethical accountants could easily Accounting Firm alter company financial records and maneuver numbers to paint false picture of company successes. This may lead to short-term prosperity, but altered

Emperor International Journal of Finance and Management Research [EIJFMR] Page 68

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813 financial records will ultimately spell the downfall of An accountant may face the ethical dilemma of companies when the investigation or other agencies reporting discovered accounting violations to the discovers the fraud. competent authorities. While it is an ethical Accountant as whistleblower accountant‘s duty to report violations the dilemma An accounting may face the ethical dilemma of arises in the ramifications of the reporting. reporting discovered accounting violations to the Government‘s investigation into the company‘s financial accounting standards board. While it is an financial records and infamous media reports caused ethical accountant‘s duty to report such violations, the by an accounting scandal could cause the company‘s dilemma arises in the ramifications of the reporting. rapid decline and may lead to the layoff of thousands Government review of company financial records and of employees. Executives and other corporate officers bad press caused by an accounting scandal could could also face criminal prosecution, leading to heavy cause the company‘s rapid decline and may lead to fines and prison time. the layoff of thousands of employees. Executives and The Role of Accountants and Auditors in other corporate officers could also face criminal Mitigating Corporate Scandals. prosecution, leading to heavy fines and prison time. In light of the various corporate scandals The effects of Greed mentioned the primary cause of all these frauds are Greed in the business and finance world leads to happened with the notice of Accountants and shaving ethical boundaries and stepping around Auditors. Therefore a need has been long felt to safeguards in the name of making more money. An educate the Important of Ethic in Corporate for long accountant can never let the desire to earn a better life. The stakeholder has high trust, belief, confidence living and acquire more possessions get in the way of on Accountants and Auditors. In order to protect their ensuring that he follows ethical guidelines for Interest, trust and confidence in the minds of financial reporting. An accountant who keeps his eyes Stakeholders the following points should be inculcate on his own bank account rather than on his to the Accountants and Auditors in India. company‘s balance sheet becomes a liability the • All the Accountants and Auditors should company and may cause serious accounting aware of their legal and ethical responsibilities, violations. Auditors should train and motivate employees ensure Omission of Financial Records quality and soundness of ethical programmers. A corporate officer or other executive may ask • Ensure fair treatment to those who act as an accountant to omit or leave out certain financial whistle blowers, This is perhaps the most important figures from a balance sheet that may paint the and sensitive issue. When sherron had raised business in a bad light to the public and its investors. questions at Enron, she was demoted. Similar fate Omission may not seem like a significant breach of would have met all those had followed sherron fair accounting ethics to an accountant because it does not treatment to whistle blowers is a basic necessity to involve direct manipulation of numbers or records. check fraud. It isre-assuring that two of three persons This is precisely why an accountant must remain of the year, selected by the popular Time magazine ethically vigilant to avoid falling into such a trap. were accountants from Enron and World Com who Ethically what is normally expected from an had dared to blow the Whistle, however, needless to Accountant and also from an Auditor is desired all say that the appreciation is much more needed from the times. within the company rather than outside.

Emperor International Journal of Finance and Management Research [EIJFMR] Page 69

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

• The Principle of Integrity should be • There are certain personal qualities that possessed by Professionals to adhere to honesty and clients and employers expect accountants to have. straight forwardness which discharging their duties. An example of this is personal morals and values. In additions to that avoid being involved in activities Ethics, morals and values are closely related which would impair the goodwill of the concepts, there are certain ethical rules that organizations, communicate adverse as well as accountants are expected to abide by. If you become favorable information with those concerned, refuse a CPA, violation of these ethical rules can result in any gift of favor which would could influence actions the loss of your license and/or legal action. Values taken or to be taken, refuse to get involved in any and morals are your personal beliefs—the things that activity which would adversely affect the you believe are right and wrong and what defines the achievement of an organizations objective, avoid personal and professional lines that you won‘t cross. conflicts and advise related parties on apparent Keep in mind that just because a situation that you conflicts which could arise in the future. encounter as an accountant violates your personal • The Auditor should have Principle of values or morals, it may not be an ethical violation. Objectivity to stick to their professional and financial • The Professionals have needed to update judgment. They should not allow bias, conflicting their professional skills and knowledge from time to interests or undue influence of others to override their time. This wills great influence on mitigating frauds business judgments. Communicate information fairly by effectively doing in their job. and objectively in such a way that the communication • The Auditors should have Professional with end user is complete and transparent. behavior in accounting and Finance to comply with • The Professional should have Principle of relevant laws and regulation and avoid such actions Confidentiality in accounting and financial which will result into discrediting the profession. management to refrain from disclosing confidential III. CONCLUSION information related to their work. Such information Recent corporate frauds and the outcry for may be however being disclosed to their subordinates transparency and honesty in reporting have given rise and cares should be taken that the latter maintains to two outcomes. First, forensic accounting skills confidentiality. have become very crucial in untangling the • Ultimately most accountants must hold complicated accounting makeovers that have themselves to the ethical standards they agreed to obfuscated financial statements. Second, public uphold when they became accountants. An employer demand for change and subsequent regulatory action or client may put so much trust I the accountant that has transformed CG scenario across the globe. As there is little to no system of checks and balances for part of this research study, one of the key objectives the accountants‘ work. Or accountants may find was ―to understand the need of ethical education to themselves in a position where an employer or client professional auditors in the field of accounting and who makes the final decision, but the accountants are auditing of wider corporate sectors in the economy, under an ethical obligation to not perform tasks that The above scandals brought to light, once again, the they know to be illegal. Accountant has to set their importance of ethics and its relevance to corporate own ethical and moral standards and hold themselves culture. All kind of scandals/frauds have proven that accountable for their actions. lack of Ethics in Professional so there is a need for good conduct based on strong ethics, Corporate

Emperor International Journal of Finance and Management Research [EIJFMR] Page 70

Impact Factor.1.14: Mayas Publication [ISSN: 2395-5929] UGC Jr. No. : 45308: Paper ID: 13170813

Governance Needs to Be Stronger from Accountants City of Erzurum,International Journal of Business and Auditors in order to mitigate Corporate Scam in and Social Science, October 2012Vol. 3 No. 20 India. [6] SAKARYA.G and KARA.S (2010). ―Türkiye‘de Professional accountants to the attention of the Muhasebe MeslekEtiğine Yönelik Düzenlemelerve public interest and maintain the credibility of the Meslek Mensupları Tarafından Algılanması accounting profession in charge, the personal interest ÜzerineBir Alan AraĢtırması‖, KMÜ should not be considered above the public interest. SosyalveEkonomikAraĢtırmalarDergisi, Vol 12(18), Ethics in accounting education helps the accountants pp.57-72. identify the basic ethics principles that can be applied [7] Ali uyar and alihaydarGüngörmüş (2014) to action. General and specialized culture, achieved accounting professionals‘ perceptions of ethics through a process of permanent training and education evidence from turkey, Accounting and education, essentially modifies the accounting Management Information Systems, Vol. 12, No. 1, profession. In carrying out the audit of financial pp. 61–75, 2013. statements, auditors should comply with ethical principle guidance issued by their relevant professional bodies. Ethics is more of a norm or a certain code of conduct expected of a group of individuals or professional body. REFERENCES

[1] Desti Kannaiah &N.S.Kumar (2009) An Urgent Need for Ethics Education for Accountants, Issues in Social and Environmental Accounting, Vol. 3, No. 1 June 2009, pp. 88-94. [2] HadiKhani (2014) the Role of Professional Ethics in Accounting and Audit, Indian Journal of Fundamental and Applied Life Sciences ISSN 2231– 6345 (Online), 2014 Vol. 4 (S1) April-June, pp. 208- 215. [3] Ali uyar and alihaydarGüngörmüş (2014) accounting professionals‘ perceptions of ethics education evidence from turkey, Accounting and Management Information Systems, Vol. 12, No. 1, pp. 61–75, 2013 [4] Vincent N. Onyebuchi (2011) Ethics in Accounting, International Journal of Business and Social Science, Vol. 2 No. 10; June 2011 [5] SelamiGüney (2013) the Problems and Ethical Attitudes of Accounting Professionals toward Accounting Errors and Frauds A Model Practice in

Emperor International Journal of Finance and Management Research [EIJFMR] Page 71