- Understand why it’s not a good idea to falsify financial statements.
- Appreciate the background behind stricter legal and professional standards in U.S. business and accounting practice.
- Understand ethics and their importance in the accounting profession.
- Identify career opportunities in accounting.
Accountant, Audit Thyself?
Consider the following scenario. You feel good that you’ve managed to create relevant, accurate, timely financial statements for your first year in business as The College Shop, but you find that you’re disappointed about one thing—your net income figure. For some time now, you’ve been trying to convince a friend to invest in The College Shop, telling him that the business would bring in at least $40,000 in income during its first year. Every time you review the income statement in Figure 12.15 “Income Statement for The College Shop, Year Ended December 31” (shown in abbreviated form below), however, you’re forced to face the fact that you earned just $30,000—$10,000 short of your optimistic projection.
Revenues − Expenses (CGS, operating expenses, interest and taxes) = Net income
$500,000 − $470,000 = $30,000
As you stare one more time at your bottom line, you’re wishing that there was some way to change that single bothersome digit and transform $30,000 into $40,000. Then it hits you. You know that it’s not exactly the most upright thing to do, but what if you were to shift half of your first-year advertising expense of $20,000 into your second year of operation? If you did that, then you’d cut the advertising expense on your first-year income statement by $10,000. Now, with your newly acquired understanding of accounting principles, you know that if you reduce expenses on your income statement by $10,000, your net income will increase by the same amount. So just to see what your “revised” income statement would look like, you go ahead and make your hypothetical change. Sure enough, mission accomplished: Your income statement now reports a net income of $40,000—your actual net income of $30,000 plus your upward “adjustment” of $10,000.
Revenues − Expenses (CGS, operating expenses, interest and taxes) = Net income
$500,000 − $460,000 = $40,000
Although you now feel even more satisfied than ever with your newfound expertise in accounting strategy, you’re once again forced to stop and think. If you merely change your net income and nothing else, the balance sheet in Figure 12.17 “End-of-Year Balance Sheet for The College Shop” won’t balance any more. Why not? Because when you inflated your net income to $40,000 and added it to your beginning owner’s equity balance of $150,000, this increased your owner’s equity by $10,000—from $180,000 to $190,000. To make sure that you’ve accurately assessed the snag in your strategy, you plug in the accounting equation—
assets = liabilities + owner’s equity
—and this, unfortunately, is what you get:
$360,000 ≠ $180,000 + $190,000.
So, now what? As you ponder the troublesome ramifications of your balance sheet, yet another accounting strategy pops into your head. At the end of the year, you still owed $6,000 for radio ads and $4,000 for newspaper ads—$10,000 that’s included in accounts payable on your year-end balance sheet. What if you just reduced your accounts payable balance by $10,000? If you did that, you’d also reduce by $10,000 the amount under liabilities and owner’s equity, cutting it from $370,000 to $360,000. Wouldn’t that make everything balance? Plugging in the numbers from your latest brainstorm, you now get:
$360,000 = $170,000 + $190,000.
That’s more like it. Now you can go ahead and “adjust” your financial statements, satisfied that you’re well on your way to mastering all of the accounting strategy that you’ll need to handle the financial-reporting needs of your new business.
Accounting “Strategy,” Ethics, and the Law
Unfortunately, you may also be well on your way to becoming the Bernie Ebbers of the small-business set. In 2002, when the giant telecom company WorldCom collapsed under the weight of an $11 billion fraud scheme, CEO Ebbers, who was convicted of securities fraud and conspiracy, got twenty-five years in a federal penitentiary (“I don’t know accounting,” he told the judge). And Ebbers wasn’t the only person on the WorldCom payroll who was charged with illegal activities: Accounting department managers went down with him. Betty Vinson, for example, a forty-seven-year-old midlevel accountant who’d followed orders to falsify accounting records, was sentenced to five months in jail. And she was lucky—she got minimal jail time because she cooperated with federal prosecutors (Pulliam, 2003).
The damage done at WorldCom spread to innocent employees as well, not to mention investors, creditors, and business partners. In 2001, when Enron, the seventh-largest company in America, melted down in the heat of an investigation into its financial-reporting practices, it took down an entire accounting firm with it—eighty-nine-year-old Arthur Andersen, then one of the “Big Five” public accounting firms. Volumes have been written about what went wrong, but we can pretty much boil it down to this: Enron executives behaved unethically and illegally, and Andersen auditors looked the other way. Instead of performing its role as public watchdog, Andersen was watching its own pocketbook: The accounting firm protected the revenues generated by lucrative consulting contracts with its client instead of protecting the client’s stakeholders. In so doing, Andersen not only shirked its responsibilities as a public auditor but also covered up evidence of its own inappropriate actions.
In 2002, Andersen gave up its licenses to practice as certified public accountants in the United States, and a company that had employed 85,000 people only 10 years earlier now employs about 200, most of them to deal with lawsuits and to oversee the process of shutting down the company for good (Moffett, 2004; Toffler & Reingold, 2003).
Who Can You Trust?
In a very real sense, the issue at the bottom of all this financial misconduct is trustworthiness. As we’ve seen, accountants are supposed to provide users with financial reports that are useful because they’re relevant, timely, and, most important, accurate. It should go without saying that if users—whether internal or external—can’t trust these reports to be accurate, they can’t rely on them to be as useful as they should be. Would you, for instance, invest in or loan money to a company whose financial reports you can’t trust?
Which—appropriately—brings us back to you and your little foray into falsifying accounting records. Let’s say that in February of your second year of operations, you have an unexpected opportunity to expand into the vacated store right next to The College Shop. It’s too good to pass up, but you’ll need quite a bit of money to outfit the space and expand your inventory. First, you go to the friend for whose benefit you “adjusted” your financial statements, but he’s just lost a bundle in the stock market and can’t help you out. Your only option, then, is to get a bank loan. So you go to your banker, and some version of the following exchange occurs early in the conversation:
I need a loan.
Let me see your financial statements.
She means, of course, the first-year statements that you falsified, and if you’re offered and accept a loan under these circumstances, you could be guilty of a financial crime that, according to the FBI, is normally characterized by “deceit, concealment, or violation of trust” and committed “to obtain personal or business advantage.” The maximum you could get under federal law is twenty years, although your case no doubt calls for a sentence measured in mere months (Federal Bureau of Investigations, 2005).
Are You Ethical?
We could give you the benefit of the doubt and agree that you wouldn’t have gotten yourself into this mess had you known the legal ramifications. We must assume, however, that you knew what you did was ethically wrong. Ethics refers to the ability and willingness to distinguish right from wrong and to know when you’re doing one or the other. Ethical and trustworthy behavior is critical in both business and accounting, and although the vast majority of businesspeople and accountants behave ethically, all of them—especially providers of financial information—constantly face ethical dilemmas in the course of their work.
Sarbanes-Oxley Act (SOX)
It will be helpful to remember that both the law and the accounting profession have taken steps to remind you of your responsibilities when you’re reporting financial information. In the wake of corporate scandals like the ones we described above, Congress passed the Sarbanes-Oxley Act (SOX) of 2002, which was designed to encourage ethical corporate behavior and to discourage fraud and other forms of corporate wrongdoing. Among other things, SOX requires its top executives to take responsibility for a company’s financial statements and subjects them to criminal penalties for falsely certifying its financial reports. SOX also set up the Public Company Accounting Oversight Board (PCAOB) to regulate accounting professionals, especially in the area of auditing standards.
The Profession’s Code of Ethics
Finally, you can always turn to the Code of Professional Ethics of the American Institute of Certified Public Accountants (AICPA), which sets down two hallmarks of ethical behavior (American Institute of Certified Public Accountants, 2006):
- Integrity. An accountant should be “honest and candid” and should never subordinate the “public trust…to personal gain and advantage.”
- Objectivity and independence. An accountant should be “impartial, intellectually honest, and free of conflicts of interest.” He or she is “scrupulous in [the] application of generally accepted accounting principles and candid in all…dealings with members in public practice.”
Careers in Accounting
You may know that Phil Knight is the founder of Nike. But you may not know that he began his business career as an accountant. Another thing that you may not know is that accounting is a “people profession.” A lot of people think that accountants spend the day sitting behind desks crunching numbers, but this is a serious misconception. Accountants work with other people to solve business problems. They need strong analytical skills to assess financial data, but they must also be able to work effectively with colleagues. Thus they need good interpersonal skills, and because they must write and speak clearly and present complex financial data in terms that everyone can understand, they need excellent communication skills as well.
If you choose a career in accounting, you have two career options:
- Work as a public accountant, whether for a “Big Four” public accounting firm or for a midsize or smaller company
- Work as a private accountant for a business, not-for-profit organization, or government agency
Let’s take a closer look at these options. Public accounting firms provide clients with accounting and tax services in return for fees. Most members of such firms are certified public accountants (CPAs) who have met educational and work requirements set by the state and passed a rigorous exam. Although public accounting firms offer consulting and tax services, the hallmark of the profession is performing external audits: the public accountant examines a company’s financial statements and submits an opinion on whether they’ve been prepared in accordance with GAAP. This “stamp of approval” provides the investing public with confidence that a firm’s financial reports are accurate. Typically, public accountants are self-employed, work for small, sometimes regional firms, or are associated with one of the “Big Four” public accounting firms—Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers—or one of the large second-tier public accounting firms, such as BDO Seidman or Grant Thornton.
Often called management or corporate accountants, private accountants may work for specific companies, nonprofit organizations, or government agencies. A firm’s chief accounting officer is called a controller. As a rule, the controller reports to the organization’s chief financial officer (CFO), who’s responsible for all of its accounting and other financial activities. The jobs of private accountants vary according to the company or industry in which they’re employed. Most private accountants record and analyze financial information and provide support to other members of the organization in such diverse areas as marketing, strategic planning, new product development, operations, human resources, and finance. Private accountants also conduct internal audits. In this capacity, they ensure that accounting records are accurate, company policies are adhered to, assets are safeguarded, and operations are efficiently conducted. Finally, they may also provide a variety of specialized services:
- Develop and prepare financial reports
- Prepare tax returns
- Perform cost accounting functions (that is, determine the cost of goods or services)
- Prepare and supervise budgets
- Manage such functions as payroll, accounts payable, and receivables
Accountants who pass a special exam and meet other professional requirements in the field of management accounting are designated certified management accountants (CMAs). CMAs often have greater job responsibilities and receive higher compensation than other accountants.
The Job and Its Prospects
So, what’s the job like? For that matter, what’s the professional life of an accountant like? Or perhaps even more important, what are your prospects for getting a job in accounting, and what kind of income can you expect if you’re able to make a career for yourself in the field? “If you’re looking for a career that’s challenging and for which the dynamics change constantly…then this is where its at,” advises one practicing CPA (Start Here Go Places, 2010). Beatrice Sanders, former director of Academic and Career Development for the American Institute of Certified Public Accountants, agrees: “Whatever form of practice you choose, accounting provides a challenging and rewarding career in which there are no limits on where you can go, or how far” (Gaylord & Reid, 2006).
The Job Market Today
“The one great benefit of choosing accounting as your career is that you will always have a job when you graduate.” Or so says one accountant CPA (in fact, the same CPA who promises a challenging career in a dynamic profession). Obviously, we can’t make any guarantees, but in order to help you better assess your prospects for a satisfying career in accounting, we can offer you some relevant facts and figures.
First of all, we can confirm that accounting graduates have always faced a favorable job market and that, according to a survey conducted by the National Association of Colleges and Employers (NACE), the year 2010 is no different. In the June edition of its Salary Survey, NACE reported that accounting employers extended the largest number of offers to new college graduates (National Association of Colleges and Employers, 2010).And what about the area that probably interests you most right now—salary? For the most part, we can report good news. The NACE survey, for example, reports that, with average salary offers of just over $50,000, 2010 accounting graduates could expect to be among the highest-paid entrants into the workforce.
- Current statutes and standards governing U.S. business and accounting practice reflect public reaction to a wave of corporate misconduct in the 2000s.
- Ethical and trustworthy behavior is critical in accounting because users trust accountants to provide financial reports that are relevant, timely, and, most important, accurate.
- The federal Sarbanes-Oxley Act (SOX) of 2002 was designed to encourage ethical corporate behavior and to discourage fraud and other forms of corporate malfeasance. The Code of Professional Ethics of the American Institute of Certified Public Accountants (AICPA) sets down two hallmarks of ethical behavior: integrity and objectivity and independence.
- If you choose a career in accounting, you have two career options: work as a public accountant or work as a private accountant.
- Public accounting firms provide clients with external audits in which they examine a company’s financial statements and submit an opinion on whether they’ve been prepared in accordance with GAAP. They also provide other accounting and tax services.
- Most members of public accounting firms are certified public accountants (CPAs) who have met required educational and work requirements.
- Private accountants, often called management or corporate accountants, work for specific companies, nonprofit organizations, or government agencies.
- Most private accountants record and analyze financial information and provide support to other members of the organization. They also conduct internal audits as well as a variety of specialized services.
- Accountants who pass a special exam and meet other professional requirements in the field of management accounting are designated certified management accountants (CMAs).
- What is accounting and what purpose does it serve? What do accountants do? What career choices do they have? Which career choice seems most interesting to you? Why?
What actions have been taken to help restore the trust that the public once had in the accounting profession? Do you believe these actions will help? Why, or why not? What other suggestions do you have to help the accounting profession and corporate America regain the public trust?
American Institute of Certified Public Accountants, AICPA Code of Professional Conduct—Current and Historical Versions (2006-2010), http://www.aicpa.org (accessed July 22, 2010.
Federal Bureau of Investigations, Financial Crimes Report to the Public (Washington, D.C.: U.S. Dept. of Justice, 2005), http://www.fbi.gov (accessed July 22, 2010).
Gaylord, G. A., and Glenda E. Reid, Careers in Accounting, 4th ed. (New York: McGraw-Hill, 2006), http://books.google.com (accessed July 27, 2010).
Moffett, M., What Happened at Enron? (Cambridge, MA: Harvard Business Review, July 2004)
National Association of Colleges and Employers, “Top Employers for the Class of 2010,” Knowledge Center, www.naceweb.org (accessed July 26, 2010).
Pulliam, S., “How Following Orders Can Hurt Your Career,” CFO.com, October 3, 2003, http://www.cfo.com (accessed July 22, 2010).
Start Here Go Places, “Ask a CPA,” Start Here Go Places, http://www.startheregoplaces.com (accessed July 27, 2010).
Toffler, B. L., with Jennifer Reingold, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (New York: Broadway Books, 2003), http://books.google.com (accessed July 22, 2010).