Ethical and Legal Obligations in Accounting

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According to Marshall (2004), "accounting is the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgements" (p. 3). Specifically, financial accounting "refers to the process that results in the preparation and reporting of financial statements for an entity" (Marshall, McManus, & Viele, p. 5). While many entities prepare their own financial statements, firms can also contract with a public accounting firm or a Certified Public Accountant (CPA) to perform services such as reviewing or compiling statements. (A CPA is a professional designation granted by individual states.) Entities that are publicly traded or complex in nature contract for…show more content…
Critics argue that use of principles-based standards would not have allowed these transactions to have remained off of Enron 's balance sheet, as the economic substance was that Enron was liable for the debt. But the AICPA Code of Professional Conduct, Rule 203, states that if following an accounting standard results in the financial statements being misleading, proper accounting treatment is to account for a transaction in a way that does not make the financial statements misleading. This is confirmed by several cases, most notably U.S. v. Simon (1969). In this Second Circuit case, Judge Friendly found that literal compliance with GAAP did not preclude auditors from being held criminally liable for producing misleading financial statements. Thus, regardless of whether principles-based or rules-based standards are used, companies should always produce financial statements that show the economic reality of transactions (p. 19). Despite the known ethical and legal obligations, all Big Five auditors (Arthur Andersen, Ernst & Young, PriceWaterhouseCoopers, KPMG, and Deloitte & Touche) were implicated in corporate accounting scandals in 2002: Enron, WorldCom, Global Crossing, Adelphia, Cendant, AOL Time Warner, IM Clone, and Bristol Myers were just a few of the publicly traded behemoths that were involved in some type of financial misstatement. To disband such a pervasive and troubled
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