Ethics and Conduct of Accounting Profession Assignment (Essay Sample)

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Ethics and Conduct of Accounting Profession (2)
1 Explain how the Nortel Scandal took place.
In the middle of the 2002, the Nortel Networks Corporation was in a critical position because its employee level was shrinking and the bonus plans tied to stock options were out of money. Therefore, the company decided to give some motivation to its current personnel as well as convince them not to leave their jobs by establishing bonus plans that were tied to the profits made. One of the bonuses was called RTP (RTP means Return to Profitability) whose main aim was to allocate and pay a onetime bonus amount to each of the company’s employee in the 1st quarter Nortel achieved a pro forma profit. This onetime bonus excluded the 43 senior executives of the company because a rule was placed upon them that they were entitled to receive 20% of the Return to Profitability (RTP) bonus share in the 1st quarter the company achieved profits, a 40% share in the 2nd and 3rd quarters and the remaining 40% share in the 4th quarter based on cumulative profitability. However, for this plan to succeed, the quarterly pro forma profits had to be more than the paid bonuses by at least a dollar. In addition, these senior executives were entitled to receive Restricted Stock Units (RSUs) based on profit targets done internally. The allocations concerning the Restricted Stock Units (RSUs) and the Return to Profitability (RTP) bonus were done internally without compliance with GAAP specifications; GAAP are simply procedures as well as guidelines that are required to be followed when presenting financial information (Davoren).
Now, when Deloitte & Touche Auditing Company performed a yearly financial statements audit for Nortel Corporation, the quarterly financial statements where calculations based on the bonuses were done were not audited. Although it was noticeable that Nortel Corporation had allocated and paid approximately 50 million U.S dollars as bonuses to selected groups after reporting profitability during the 2nd quarter of the year 2003.
In 2003 1st, 2nd and 3rd quarters, Nortel made profits that enabled the payment of its 43 senior executive the Return to Profitability (RTP) bonus and Restricted Stock Units (RSUs).
However, in the 3rd quarter, the company made an unusual move by suggesting a need for restatement of financial statements for of previous years so that the reported net losses from the previously years could reduce and the reported net assets could increase. This made the Company’s board of directors to review the reasons for restatement through their established Special Committee. As a result, it was established that the provisions’ financial statements from the 3rd quarter of 2002 up to the 2nd quarter of 2003 were released in a way that did not comply with the GAAP (Generally Accepted Accounting Principles).
2 The Nortel Networks Corporation’s financial statements for the quarters were altered with the help of the company’s personnel even though the company’s 1998 code of conduct was termed as top notch. Explain how the alteration was possible
To begin with, in the 3rd quarter of 2002, an extensive analysis of the company’s provisions was directed by Doug Beatty, the Chief Finance Officer, and the completed analysis was reported by Michael Gollogly, the Controller, that there was an excess of 303 million dollars of accruals from charges taken as left over in previous years; these were restructuring charges. According to GAAP, the accruals were to be released without delay to income however, both the officers of the company, Doug Beatty and Michael Gollogly, refused to disclose this discovery to the Board of Directors and Audit Committee. This refusal to disclose important information to the Board of Directors and Audit Committee is a clear indicator of an agenda behind the scene because that time was a desperate time for the company and desperate measures needed to be initiated secretly.
Also, the CEO of the Company, Frank Dunn, was the one driving the top management, that is the senior executives to achieve targets based on earnings before being taxed via provisions that were not in accordance with GAAP. Therefore, the top management issued practices that were to be followed without questioning even though they were wrong, meaning they had the power to do whatsoever they wish without being questioned by anyone below their management level. The top management message was that the earnings targets that were not taxed could be attained simply by using some practices in accounting even though the finance department (Finance Manager) had the knowledge that these practices lacked compliance with the United States GAAP.
Another act that led to the manipulation of the Company’s financial statements is when Deloitte & Touche Auditing Company performed a yearly financial statements audit for Nortel Corporation but the quarterly financial statements where calculations based on the bonuses were done were not audited. Although it was noticeable that Nortel Corporation had allocated and paid bonuses of approximately 50 million U.S dollars to selected groups after reporting profitability during the 2nd quarter of the year 2003.
These bonus plans which were tied to quarterly pro forma profits and which were not audited resulted to the manipulation of the financial statements.
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* There were a series of recommendations made by the Special Committee to prevent recurrence of the accounting conducts. Give these recommendations
To begin with, it is a requirement that professional accountants act in a responsible manner when engaging in accounting services and on evaluating financial information that are sensitive. Accounts should therefore exercise moral judgments in all accounting activities at all times, be responsible in providing customers/clients with professional services as well as presenting accurate and honest evaluation of a company’s financial well-being to the general public (Vitez).
According to the case study and due to Nortel Networks Corporation’s unsuitable accounting conduct which was reviewed by the Special Committee, a team established by the Company’s Board of Directors, a number of recommendations were made. The Special Committee was responsible for making these recommendations in order to prevent any instances that may trigger repetition of such unsuitable accounting conduct.
The Special Committee recommended a set up of conduct standards. These standards were to be enforced within finance department and other departments too and that the board of directors should be responsible for communicating the required expectations, which is adhering to the ethical standards by all employees. All employees must therefore follow the highest standards of ethics in the company.
The second recommendation was directed to all employees. It was a requirement that every year, each employee to put in writing an acknowledgement that he or she perfectly read, understood and is ready to adhere to the code of ethical conduct as well as business practices.
* Explain what principles of ethics and responsibilities of the professional accountant were violated.
A high standard of ethical conduct is expected of those engaged in any profession. In accounting profession, accountants are faced with many ethical dilemmas some of which are complex and even difficult to solve (McGraw-Hill Education). For accounting profession, a code of ethics for professional accounts is what establishes professional accountants’ ethical requirements. There are a number of fundamental principles of professional ethics for professional accountants; however, only those principles violated in this case study will be explained (Nikolai et al. 23).
The first principle violated by the Company is integrity. This principle requires an accountant to be straightforward as well as honest in his or her professional as well as business relationships. Accounts should restrict themselves from acts that can lead to wanting personal gains or even advantage using information that is confidential. Intentional opportunities to deceive and manipulate financial information must be avoided at all circumstances,
The second violated principle is objectivity. Objectivity principle requires a professional accountant never to allow bias, conflict of interest or any influence from others that may require or force him/her to override professional and even business rulings. Failure to remain objective may hinder an accountant’s ability to provide a honest opinion about a company’s financial information.
The thi...