I bet you must have heard about fraudulent accounting practices and accounting fraud more times than you can imagine but do you actually appreciate the dangers of doctoring your book of accounts.
This means that no meaningful economic activity will ever take place if all that consumers of accounting information can lay their hands are based on fraudulent accounting practices. This article is written to highlight the dangers of fraudulent accounting practices and reasons why it should be discouraged by all concerned.
Consequences of fraudulent and creative accounting
Collapse of accounting profession: the existence of accounting as a profession rests on the amount of confidence that the public are willing to place on accountants. The profession will quickly collapse if no one believes the figures that accountants produce. Kudos to the auditors that work tirelessly in order to add credibility to piece of financial statements that are prepare by businesses and entities.
Though it is the duty and responsibility of directors of a company to prepare the financial statements of a company, but the fact still remains that most directors have no accounting knowledge and will ultimately employ the service of an accountant that helps in preparing the financial statement.
Leads to economic crisis: toxic accounting is a precondition for economic crisis. No meaningful investment decision can be made if all the accounting information at the disposal of the decision maker is based on falsified accounting data. Think of the last global economic crisis and how it all started, investors were deceived into buying toxic assets that only requires time for the bubble to burst, which eventually did happen.
Leads to personal liability: within the purview of the laws, directors of a company can be personally liable for the losses of those that entrusted them with their resources. Again, the classic example is the case of Enron where a good number of those charged with corporate governance were remanded in prison and also lost all they had.
Causes pain and hardship: thousands of jobs are lost each time a company collapse due to fraudulent accounting and financial reporting. Take the classical case of Enron and WorldCom as examples. Not only were jobs lost, people’s life savings were wiped out in the stock market on the day the news of the accounting scandal was released.
Very expensive: quality always saves money. Imagine what it will cost a company to rectify a contentious item on its accounts when found by the auditors. Also, the auditors will tend to charge a company more if they find out that the accounting system or internal control of a company is questionable. All these can be avoided if ethical accounting practice is upheld by all involved.
Fine from regulatory agency: one of the many consequences of keeping toxic accounting records is the possibility of being fined as a company by the regulatory agencies which can sometimes run into millions. Fraudulent accounting and the stress that comes from it is simply not worth going through, stay away from it.
Reputational damage: nothing damages the reputation of a firm like falsification of accounting records. Experience has shown that it takes concerted effort to respond and rectify negative press once it is released to the public.
The aim and importance of accounting which is to provide useful information that makes economic sense will be defeated if businesses continue to falsify their accounting record. Every economic activity will be grounded if accountants and those that carryout management functions decodes to patronise fraudulent accounting.
I once remember an incident that happened to me on Buchannan Street in Glasgow when I was vindicated from an offence I knew nothing about but could not have escaped being cautioned if I had not identified myself as an accountant.
This incident tells me that the public still see accountants as honest people and people with integrity. This reverend resect that is being accorded to accountants will be lost if cases of fraudulent accounting practices and accountants being found guilty of stealing from their employers is reported less frequently.
This will not happen without combined effort from all accounting practitioners. Together, we can all say no to unethical and questionable accounting techniques. If everything that has been written in the article had fell on deaf ear, maybe this one will fall on listening ear ‘you can go to jail for practising unethical accounting’
Be a good ambassador of this noble accounting profession.