Ethics & Legality in Accounting
Nearly all businesses keep some form of records documenting all economic events and transactions that directly affect the business's finances. For stakeholders in the company (such as investors), it is important that these records remain both accurate and straightforward so that they receive an accurate picture of the business's health. To ensure this two main sets of guidelines bind the practice of accounting: legal and ethical.
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Legal Accounting
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Legal accounting is defined as accounting that accords with the written law. In many situations, companies must maintain and publish records in a specific way to avoid deception. For example, companies may not present false accounting records to investors in an effort to solicit funding. This is considered a form of fraud, and is against the law. Many laws, such as the federal Sarbanes-Oxley Act, passed in 2002, are designed to minimize deceptive accounting.
Ethical Accounting
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Although some accounting techniques may be legal, this does not necessarily mean that they are ethical. Unethical accounting can take many forms, including accounting that works to intentionally mislead and accounting that represents a conflict of interest. For example, according to Peter Elkind and Bethany McLean, authors of "The Smartest Guys In The Room" (a history of the Enron scandal), accounting firm Arthur Andersen acted unethically when it helped Enron hide large losses through deceptive accounting.
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Enforcement of Laws
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A number of different bodies, both state and federal, enforce accounting laws. According to the legal reference website U.S. Legal, the Federal Securities and Exchange Commission is legally allowed to prescribe accounting principles for all companies that issued publicly traded securities. Similarly, the SEC legally regulates the methods of accounting used to determine the information placed in certain kinds of quarterly reports, such as10-Qs and 8-Ks. Failure to adhere to these laws can result in a company being fined or even jail time for the individuals responsible.
Enforcement of Ethics
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Ethical guidelines in accounting, unlike legal statutes, are not backed by the force of law. Many ethical guidelines are therefore formulated not by government agencies, but by private organizations. The Financial Accounting Foundation and the American Institute of Certified Public Accountants have both been instrumental in formulating ethical guidelines for accountants. While an organization like the AICPA cannot enforce these guidelines through the assessment of fines or jail time, it can enforce them by withdrawing certain recognitions or titles. For example, an unethical accountant may have his certification withdrawn.
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