Effect of Unethical Behavior Article Analysis - Situations Leading to Unethical Practices and Behavior in Accounting

In introduction, the purpose of this article is to identify situations that might lead to unethical practices and behavior in accounting. Next, the effect of the Sarbanes-Oxley Act of 2002 on financial statements will be examined. Finally, I will prepare a question based on my article analysis for class discussion for Week 5.

Situations Leading to Unethical Practices and Behavior in Accounting

Prior to 2002, there were no major regulations that were enforced to maintain lawful ethical accounting practices. Since this was the case, there were no internal controls and thus was a leading cause that enable large corporation to commit fraud by altering books to show more profitability. Due to the overstating of profit in these large companies, investors were provided false information which made their want to invest in these corporations more. An example of a corporation that did this was Enron.

The Enron Corporation was a company that was based in Houston, Texas that specialized in energy. At the time Enron was one of the leaders in pulp and paper, and communications, natural gas, and electricity. Enron stated economic conditions were constant by efficient and designed accounting scheme. There were several reports that involved irregular accounting procedures which bordered on fraud. These reports were between Enron and their accounting firm, Arthur Andersen. Enron's stock eventually plunged from $90 a share to $.30 a share. What was once considered a great stock was now a disastrous even in the financial world. All of this was brought to a head when Enron revealed that much of its profits were the result of deals with special purposes entities (Davis, Donna. 2011). Therefore the results were the any debts or losses that Enron suffered were not reported on financial statements. These unethical practices and behaviors lead to misleading financial statements and analysis. By the time the investors realized that these businesses were not as profitable as state, it was already too late and the results was millions of dollars lost. This example and many other eventually led government to the Sarbanes-Oxley Act of 2002 (SOX). This act enforces the ethical reporting accounting practices and ensures that situations like Enron will not happen again.

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Effect of SOX on Financial Statements

The Sarbanes-Oxley Act of 2002 was enacted by United State Congress to lookout for shareholders from the likelihood of false accounting behavior by companies. This created a world wind of anxiety for corporate executives. Section 302, an authorization which require senior executives to confirm the precision of the account fiscal report. Corporations were mandated with harsh modification to improve financial disclosure and stop accounting deception.