The importance of audit independence can be categorized into four reasons: Firstly, audit independence can hold the public confidence and avoid interest conflicts; Secondly, audit independence can help auditors to provide high quality financial report and avoid scandals like ‘Enron bomb’; Thirdly, the development of no-audit services make it more difficult but more important to maintain audit independence; Lastly, audit independence can improve the quality of audit and it can assist managers to make strategy formulations. Stakeholders make economic decisions by taking advantage of financial reports. Whether those reports are related and reliable are questions. Audit can help to solve this problem. However, auditor fails to fulfill the duty if they cannot remain independence in the conducting process. On one hand, report users will doubt this kind of dependence if they thought auditor and consigner belong to the same party. On the other hand, when auditor cannot keep an unbiased Continue reading
Business Ethics
Importance of Ethical Climate in Business
A strong ethical climate is a system of informal rules concerning the stakeholders’ behavior in internal or external environments. In such an environment, organizational leaders take the initiative to shape or support the ethical environment. Ethical climate corresponds to organizational personality, which has a direct impact on both organizational success and employee satisfaction. Ethical climate represents common values and beliefs that hold an organization intact. Given that employee and customer dissatisfaction are some of the causes of turnover and loss of trust respectively, leaders at all levels of an entity must be aware of their predefined roles and responsibilities in preserving an ethical workplace setting that can improve both customer experience and employee satisfaction. While most managers or organizational leaders recognize the significance of ethical climate in customer and employee satisfaction, some fail to realize the direct impact they have is shaping it. Therefore, shaping ethical climate is one of Continue reading
Relevance of Ethics in the Age of Technology
Unprecedented in its speed and scope, scientific and technological progress is one of the most obvious realities of the modern time. Technology enormously increases the productivity of social labor, expanding the scale of production. It has achieved incomparable results in mastering the forces of nature. Moreover, technology has become the basis of the complex mechanism of the modern development. A country that fails to provide a sufficiently high rate of scientific and technological progress and incorporate its results in various areas of public life is condemned to be a underdeveloped and dependent state with a subordinate position in the world. In the recent past, it was common to praise the scientific and technological progress wildly as the sole source of the overall progress of the humankind. It is the view of the scientism, especially the natural sciences, as a superior and absolute social value. However, the rapid development of science Continue reading
Earnings Management – Meaning and Mechanism
The relationship between managers and shareholders in the business world cannot be disputable. This relationship is interpreted under Agency Theory. They are very dependent each other, even somehow there exist conflict of interest among these two parties. In example the shareholders put on trust to agency by contributing huge amount of money in terms of paid up capital, so that agency can generate business and obtain profit and increase the firm’s value as principles return. Meanwhile agency (managers) is dependent to the principles for remunerations and bonuses as compensation. Because of the great pressure from principles (shareholders) towards the high performance of firms values, so agency commonly practice earnings management in order to be sustained in market place. Earnings management may involve manipulation of accounting record, intentional omission or intentional misapplication of accounting o accounting principles. Earnings management is defined as the intentional misstatement of earnings leading to bottom line Continue reading
Case Study: Fraudulent Accounting and the Downfall of WorldCom
The WorldCom scandal can be called the worst case of accounting fraud in the NSE, and it prompted the initiation of radical reforms that continue to determine how publicly traded companies conduct various transactions. WorldCom was an international telecommunications company with the second largest long-distance telephone connections. WorldCom had the reputation of a telecommunication giant with immense innovation power. However, the company’s CEO Bernard Ebbers could not use WorldCom’s strengths to create a competitive advantage but instead chose to collude with some employees and defrauded the company’s shareholders of over $11 billion. According to the Fraud Diamond and Fraud Triangle theories, four main elements define the thought process of an individual who commits occupational fraud. They include the incentive, opportunity, rationalization, and capability. The incentive presupposes that the person committing the fraud has something to gain from it. Mostly, they have a reason that drives them to commit the fraud. Continue reading
Importance of Business Ethics in Organizations
Business ethics is a compilation of the moral values and conduct standards that govern the decisions and actions in the workplace. Business ethics defines social responsibility and the balance between profitability and righteousness. On the other hand, morality is the conduct principles that govern a group or an individual, for instance, accounting ethics or personal ethics. Business ethics principles prepare and encourage managers of the organizations to articulate individual moral responsibilities, the responsibility of their profession, as well as their company’s. It also aims at bringing out the attention and the process of making moral decisions on external events. Ethical reasoning enables stakeholders to determine what is fair, good, and equitable for those who get affected or affect business decisions. Principles of business ethics can be applied to examine personal motivation so as to resolve an ethical dilemma. The principles include the rights principle, justice principle, relativism, utilitarianism, universalism, and Continue reading