Ethics in Accounting

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Ethicsin Accounting

Ethicalconduct is exceedingly critical in almost every undertaking. Inaccounting, ethics is very significant and requires individualsentrusted with the operations of an organization show high standardsof conduct with respect to the different aspects of business. Forinstance, accountants are required to show ethics through ensuringtransparency in their undertakings. In the accounting field, theestablishment of SOX helped in dealing with ethical issues. Thisreport will apply SOX in discussing ethical concerns raised inCooperSterling Corporation scenario.

Accordingto the SOX Section 402, no organization is capable of making personalloans to officers as well as directors of public companies withlimited exceptions and ordinary course of business, the loans shouldbe within the normal market terms (Hamilton et al., 2008). From theCooperSterling Corporation case, this section was ignored becausewhen the company went public and its headquarters were moved toMadison Avenue in New York, Donald also was forced to move to NewYork City but since he could not afford the lifestyle of the newenvironment, he arranged for CooperSterling to provide him with aloan having zero interest so as to purchase a new wardrobe and anapartment. As such, it was unethical for the organization to provideDonald with a zero interest loan since it was against the provisionsof the SOX under section 402. In case Donald was to be provided withthe loan, the company should have applied the normal market terms,where it could have used the market interest rates.

Section306 of the SOX prohibits officers and directors of a publicly-tradedorganization from engaging in the trade of shares during 401 (k)blackout periods, and any profits that become realized resulting fromtrade during this period may be recovered by the organization orthrough shareholder derivative lawsuit (Hamilton et al., 2008). Fromthe CooperSterling Corporation case, Donald violated this sectionsince when SEC decided to carry out an audit, most new employeeswere not in a position to sell their stock because their stock weresubject to selling blackouts of CooperSterling stock in their 401 (k)plans. However, Donald decided that he must sell $25,000,000 of hisstock prior to the end of the SEC audit in case the value diminished.This violated this section because no officer or director of apublicly-traded organization should trade during the 401 (k) blackoutperiods. Therefore, Donald conducted unethically in this caseaccording to this provision.

UnderSOX, section 302 requires the Chief Financial Officer (CFO) and theChief Executive Officer (CEO) of a publicly-traded organization topersonally certify the accuracy of the financial reports filed withthe Securities Exchange Commission (SEC) (Hamilton et al., 2008).However, this was a different scenario when it came to theCooperSterling Corporation. In the CooperSterling case, Donald, theCEO, was not ready to certify the accuracy of the financial reportsfiled with SEC. The moment Donald realized that SEC was going to beinvolved with auditing he decided that SEC could not do anything tothe organization in case there was no evidence. So, he ordered thedestruction of all accounting records to do with MadCo throughshredding so as to ensure that no evidence was available to show theinaccuracies of the financial reports. This was unethical because asthe CEO, he could have personally certified the financial reportfiled with SEC because he was not ready to certify the accuracy ofthe financial reports, he went against this provision.

Anotherethical concern that emerges in the CooperSterling Corporation caseis that of membership in the audit committee. In order to realizeindependence in the audit committee, section 301 of the SOX indicatesthat no consulting, advisory, or other compensatory fee fromcorporation should be given to the committee members except the usualboard pay. The second part of this section argues that an auditcommittee member should not be an affiliated person and should alsonot be an executive officer. From the CooperSterling case, when thereis suspicion concerning the undertakings and transactions of Donald,he indicates that he knows there are no problems because he is partof the audit committee. Being a member of the audit committeeviolates the provisions of this section because Donald is the CEO ofthe organization, which implies that he would influence theindependence of the auditors. Thus, according to the provisions ofthis section, the CEO does not conduct himself ethically by being amember of the audit committee.

Underthe SOX provisions, section 406, it is important for a company toreport if it has a code of ethics for senior financial officers andreport changes in the code in case a company does not have a code ofethics for senior financial officers, it has to indicate the reasonsfor not having the code of ethics (Hamilton et al., 2008). In thecase of CooperSterling Corporation, it emerges that there is no codeof ethics for the senior financial officers. This emerged as MargeretOlson, a senior staff accountant, speculated that Donald was actingunethically or illegally. Therefore, the management of theorganization has conducted unethically according to this provision bynot having a code of ethics for the senior financial officers of theorganization, and not providing the reasons for lacking the code ofethics.

Also,according to section 806 (a) of the SOX provides for protection foremployees of publicly-traded organizations. The section provides thatno company or any officer, employee, contractor, subcontractor, oragent of a company under section 12 of the SEC Act of 1934 (15 U.S.C.78l), or under section 15(d) of the Securities Exchange Act of 1934(15 U.S.C. 78o(d)) may discharge, suspend, demote, threaten, harass,or in any other manner discriminate against an employee in the termsand conditions of employment due to any lawful act done by theemployee. From the CooperSterling case, Margeret Olson became firedby the CEO due to writing a letter that stated that if there wereproblems in the company, the auditors of the company would take careof it. This violated the provisions of SOX, which was unethicalconduct.

Accordingto section 401 of the SOX provisions, it is important that all offbalance sheet transactions, obligations, and arrangements becomereported in a manner that is not misleading. This helps in ensuringthat organization officers conduct themselves ethically andresponsibly in handling of off balance transactions. However, in thecase of CooperSterling, handling of such matters is misleading. Thisis because in the organization, the CEO does not want to clearlyindicate the appropriate performance of the organization, but insteadwants the off balance sheet transactions to be reported in amisleading manner. For instance, he arranges a deal for his salaryincrease and bonus, which are to be tied on the general revenue ofthe company and the stock price of the company. This is misleadingand emerges as unethical according to the SOX provisions.

Section802 of the SOX Act helps in dealing with companies that becomeengaged in illegal destruction of documents since this is unethicalas it attempts to prevent litigations from being carried outeffectively. According to this section, criminal sanctions areprovided for entities that engage in illegal destruction of documentsbefore the commencement of litigation. From the CooperSterlingCorporation case, Donald and auditing firm ordered the destruction ofall the accounting papers for the past two years in an attempt toprevent SEC from finding any evidence from the organization’sfinancial reports. This is an unethical conduct as per the section asit tends to tamper with the litigation process.

Accordingto SOX Act, Section 409, each public company is required to discloseon a current and rapid basis, any additional information concerningthe company’s financial conditions. This is an important aspectsince it helps in ensuring that there is accountability andtransparency based on the current financial conditions of thecompany. According to the CooperSterling Corporation case, theorganization failed to disclose its additional information in acurrent and rapid basis concerning its financial conditions this canbe seen through the CEO in conjunction with the CFO forming a specialpurpose entity, which they would use in indicating that the parentcompany is profitable. This is unethical because through the specialpurpose entity, the organization changes its financial condition, butthis is not revealed to the stakeholders.

Furthermore,under section 303 of the SOX Act, SEC is directed to adopt rules thatwould make it illegal for any director or officer (or any under theirdirection) to influence or coerce the audit to make it misleading.This is critical because it would help in ensuring that the auditingis not tampered with and thus reflects the truth of the financialcondition of the company being audited. From the CooperSterlingCorporation case, this is not the case because the CEO plays a bigrole in influencing the audit so as to make it misleading. Forinstance, the CEO and the lead auditor are good friends which implythat the CEO can easily influence the audit through friendship. Also,the CEO himself is in the audit committee, which is an indicationthat he can be capacity to influence and mislead the audit.

Inaddition, under the SOX provisions section 304, in case thefinancial statements become restated as a result of misconduct, theCFO and CEO should return bonuses or other incentive-basedcompensations for the period of 12 months following the firstissuance of the report (Hamilton et al., 2008). In the case ofCooperSterling, SEC decided that the 2015 results for the companyneeded to be restated because the audit firm and the company failedto report the off-the-book transactions to MadCo. This is anindication that there were misconducts emanating from the CFO andCEO, and thus the CEO and the CFO should return bonuses or any othercompensation that is incentive-based for the period of 12 monthsfollowing the initial issuance of the report.

Inconclusion, from the CooperSterling Corporation case, it is apparentthat the CFO, CEO and the audit firm that carried out auditingservices for the company engaged in unethical conducts, which areprovided for in the SOX Act. Most of the undertakings of theseofficials were punishable under the provisions of the Act. As the SOXAct indicates, it is wrong for the company directors or officials tobe involved in undertakings that would directly affect the investorsof the company. In the case under considerations, the CFO and CEOwell knew what they were doing would result in direct impact to theinvestors, who did not have any knowledge. This is unethicalaccording to the provisions of the SOX ACT for instance, arrangingfor a special purpose entity so as to always record profitabilitydespite the situation, was unethical.


Hamilton,J., Trautmann, T., &amp Commerce Clearing House. (2008).Sarbanes-Oxleymanual: A handbook for the Act and SEC rules.Chicago, IL: CCH Inc.