1. Code of Ethics for Professional Accountants
Accountants hold a position of public trust. The International Ethics Standards Board for Accountants (IESBA) enforces five fundamental principles:
- Integrity: To be straightforward, honest, and truthful in all professional relationships.
- Objectivity: To not allow bias, conflict of interest, or undue influence of others to override professional or business judgments.
- Professional Competence and Due Care: To maintain professional knowledge and skill at the level required to ensure clients receive competent service, acting diligently in accordance with standards.
- Confidentiality: To respect the confidentiality of information acquired through professional relationships, never disclosing it without proper authority or using it for personal advantage.
- Professional Behavior: To comply with relevant laws and regulations, avoiding any conduct that might discredit the accounting profession.
2. Corporate Governance Mechanisms
Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.
- The Board of Directors: Protects shareholders by overseeing senior executives.
- The Audit Committee: An independent subcommittee of the board made up of non-executive, financially literate directors. They oversee the financial reporting process, select external auditors, and review internal controls.
3. Historical Scandals and Legislation
- Enron (2001): Used Special Purpose Entities (SPEs) to hide billions of dollars in debt from its balance sheet, leading to the collapse of the energy giant and its auditor, Arthur Andersen.
- WorldCom (2002): Classified billions of dollars of ordinary operating expenses as capital expenditures on assets, inflating net income and cash flows.
- Regulatory Response: These failures led to the Sarbanes-Oxley Act (SOX) of 2002 in the United States. SOX introduced strict penalties for corporate fraud, required management to certify financial reports, and created the PCAOB to oversee auditors.