Review of Accounting Ethics, Research Paper Example

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Research Paper

Introduction

The accounting scandals of yesteryear, coupled with new ones during the 2007-2008 financial crisis, still affect the public’s perception of the accounting profession.  Indeed, Enron’s collapse in 2001, followed by the allegations and ultimate collapse of Worldcom, were largely a function of corporate executives and accountants failing to tell the truth. This round of scandal resulted in the US passing the Sarbanes-Oxley Act in 2002. Just after that round of malfeasance had left the public’s memory, an even greater threat to the finance profession in general, and the accounting profession in specific, emerged: the financial crisis of 2007-2008.  While this round of scandal had a much broader scope than the earlier one, the loss of public mistrust was far deeper. The Dodd-Frank Bill, legislation that aimed to make the financial industry more transparent was the result. This paper will focus on the recent case of KPMG audit partner Scott London, and its chilling impact on the public’s and firms’ trust in the accounting profession.

Analysis

KPMG partner Scott London seemingly had it all.  The partner in KPMG’s southern California branch was the audit partner to a number of larger, blue-chip firms: Herballife, Skechers, and Pacific Life were some of his clients.  London, as one of KPMG’s most trusted partners, navigated between corporate and community leadership roles with ease: He served as a board member on a number of community boards.

London, however, was essentially living a double life: He was passing on inside information on the companies on which he supervised the audit to a friend in return for money. London was essentially guilty of passing on “inside financial information” on publicly traded companies in violation of KPMG and SEC ethical rules.

The impact of the accounting breach on KPMG was devastating. Within hours of learning from FBI intelligence that London was involved in inside training, KPMG fired London.  The effect on London’s previous clients was also dramatic: KPMG had to convince the firms that even though they had failed to protect the most sensitive of financial information, they deserved another chance moving forward. The SEC clearly lays out in section 21(d) and 21A of the 1934 Securities Act that the use or passing of inside information is illegal.  London’s behavior essentially put confidential market information into the hands of one his friends, a case of insider trading that could have further negative consequences on the company’s whose information was stolen and not reported publicly.

Perhaps the most damaging of the element of the case was that KPMG was essentially unaware of London’s behavior.  Indeed, even though the FBI had conducted surveillance on London for a period of time, KPMG was not aware of London’s passing on of sensitive information to his informant.  A question arises of what KPMG could have actually done to prevent: a) the passing of the information to the unauthorized source; b) to understand what London was doing purportedly outside of the office. Overall, KPMG could have instituted more advanced checks on partner and staff use of electronic media (searching) and attempting to find out how certain information was gleaned that may or may not have been relevant to the audit.  This case, however, does not present easy answers for KPMG or those hoping to prevent similar occurrences in the future.  If staff had been the ones attempting to use inside information for profit, more red flags would have appeared: attempts to access confidential information and unorthodox working hours may have been warning signs for this behavior.

As the CFO of KPMG, one could take the following measures to prevent a similar occurrence in the future.  One, report any strange behavior directly to the managing partner of the firm.  This may seem simple but it might give staff the right channels to report suspicious behavior in the future.  Second, the firm should introduce a whistle blowing program that would pay staff a certain bonus if they report illegal behavior up the chain of the command.  In this case, it is not out of the realm of possibility that staff would have given up information for a payout, but that incentive has to be there. Finally, the firm could move that some sort of disclosure regarding the portfolio of the partner involved be put in a blind trust during the auditing period.  Although London did not apparently trade on the inside financial information himself, it is a step in the right direction to prevent future occurrences.

Conclusion

Overall, the Scott London affair raises uncomfortable questions about the current state of ethics in the accounting profession.  The past decade has witnessed an unprecedented cascade of new regulations aimed at preventing financial malfeasance and promoting ethical behavior among accountants.  Indeed, while some commentators have rightly posited that the Enron and Worldcom affairs may have been the nadir of public perception of accounting ethics, there are still a number of resolved issues.  That is, the regulatory framework has advanced sufficiently from its original state to identify and prosecute those who fall short of the mark.  The fall of Scott London shows that human greed and personal profit maximization may be human ills that cannot be regulated.  The current business and regulatory environment is more conducive (than ever) to ethical behavior, the only problem is: it still depends on human behavior to make it work.

References:

AccountingAge (2013).  The Scott London Affair. Available at: http://www.accountancyage.com/aa/news/2271503/exkpmg-partner-enters-plea-agreement-to-fraud.

Hurley, R. & Harvey, T.  Insider Trading: A Wager in Life.  Available at: https://www.acfe.com/article.aspx?id=4294979387.

Miley, C. (2013). SEC charges ex-KPMG official with insider trading. Available at: http://jurist.org/paperchase/2013/04/sec-california-da-charges-ex-kpmg-official-with-insider-trading.php

Walsh, A. (2012).  A Case Study on Preventing Insider Trading.  Available at: http://www.cpataxmag.net/walsh-stories/41-amy-walsh-columns/883-kpmg-herbalife-partner-resigns-a-case-study-on-preventing-auditor-insider-trading

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