Things that Can Damage Your Career

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A perceived lack of integrity caused irreparable damage to both Andersen and Enron. How can you apply the principles learned in this case personally? Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might adversely affect your career. What are the possible consequences when others question your integrity? What can you do to preserve your reputation throughout your career? A perceived, or even likely more detrimental to one’s career, a proven lack of integrity, can cause damage to a career in many ways.

Integrity is an important foundation in client and employee/employer relationships. Integrity equates to placing trust in an individual that he or she will conduct themselves with ethical and moral standards. Studying the damage caused to Andersen and Enron is a good example to conduct oneself with a high standard and not engage in activities at our outside of work which would cause someone to question your integrity as well as the trust relationship. An example of involvement in unethical or illegal activities, or the appearance of involvement which may adversely affect your career, would be participation in gambling.

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While this activity is legal in some states and venues, this activity could be extrapolated to one’s personality which could go against the moral of integrity of clients or supervisors. Since this is a perceived negative activity, a client or employer might wonder what risks of integrity or moral standards the individual applies in work activities. When this happens, clients or supervisors may lose trust in you and decide to work with someone else or you may be overlooked for promotion or have other negative consequences.

To preserve your reputation throughout your career, one should always conduct themselves with high ethical and moral standards to maintain their integrity. This would include judgment and decisions made at work as well as activities engaged in outside of work. 8. Why do audit partners struggle with making tough accounting decisions that may be contrary to their client’s position on the issue? What changes should the profession make to eliminate these obstacles?

Prior to the Sarbanes-Oxley Act of 2002, partners looking to maximize services they could provide to clients, namely consulting services, created a conflict of interest in the independence in the core relationship external auditor and clients. Some partners may be less inclined to make tough accounting decisions which impact clients, as they would fear losing the additional revenues generated by “add on” services such as consulting. In many cases revenues from consulting far exceeded revenues from the external audit attestation of the financial statements.

With the Sarbanes-Oxley Act of 2002, standards were created to greatly limit the types of add on services external auditing firms can perform. When enacting the Sarbanes-Oxley Act, this lack of independence was taken into account to reduce the types of add on services to greatly reduce a partner’s hesitancy in making tough accounting decisions. A governmental regulatory agency was created to monitor external auditing firms’ compliance with standards, including this issue of auditor independence.

This agency is the Public Company Accounting Oversight Board (PCAOB) which enforces professional standards, ethics, and competence of accounting firms. A Securities and Exchange Commission (SEC) rule was also enacted to require external audit firms to rotate primary audit engagement partners off of clients after approximately five to seven years. This rule was enacted to prevent too close of relationships between external audit firms and client management, which may cause independence issues.

Further, reporting requirements by external auditing firms to their clients’ audit committees were mandated to include: (i) critical accounting policies used; (ii) alternative treatments of financial information within GAAP that have been discussed with management; (iii) ramifications of the use of such alternatives, and the treatment preferred by the accounting firm; and (iv) other material written communications between the auditor and management. 9. What has been done, and what more can be done to restore the public trust in the auditing profession and in the nation’s financial reporting system?

The enactment of the Sarbanes-Oxley Act of 2002 was an effort to make sweeping changes to restore public trust in both the accounting profession and financial reporting performed by companies. Given the problems in the case of Arthur Andersen and Enron where both the external audit firm and management made unethical decisions which caused public trust to erode, these sweeping changes were necessary. In addition to the changes required of external audit firms, as discussed in question #8, the Sarbanes-Oxley Act created additional requirements of companies related to the accuracy of financial reporting.

The Act began requiring CEOs and CFOs to certify in the financial statements of public companies related to the accuracy of financial statements (“report”). Specifically, the certification requirements require certification that: • they have personally reviewed the report; • based on their knowledge, the report does not contain any material misstatements or omissions; • based on their knowledge, the financial statements and other financial information included in the report fairly present in all material respects the company’s financial condition and results of operations; they are responsible for establishing and maintaining internal controls, and have designed and reviewed the effectiveness of internal controls to ensure that they receive material information in a timely manner, and have presented their conclusions about the effectiveness of internal control in a report based on their evaluation; • that they have disclosed to the audit committee any fraud and all significant deficiencies in the design or operation of the internal controls hich could adversely affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditor any material weakness in internal controls; and any fraud (material or immaterial), that involves management or employees who have a significant role in the issuer’s internal controls; and, • they have indicated in the report whether or not there were any significant changes in internal controls or other areas that affected internal controls subsequent to the date of their evaluation, including any corrective actions taken regarding significant deficiencies and material weaknesses.

Going forward, enacted laws (including the requirements of the Sarbanes-Oxley Act of 2002) should be periodically reviewed to determine if they have been adequate. In cases where further unethical behavior leads to misstatement of financial statements which mislead investors and other impacted parties, studies should be performed to determine if additional laws or standards should be enacted.

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