Accounting, just like any other professionals are required to follow set rules and regulations in discharging their duties. Several ethics and moral values are paramount in effective accounting. These professional ethics in accounting were first propagated by Luca Pacioli but have later been expanded by various federal governments as accounting organizations. However, it is important to note that failure to follow these ethics have resulted to numerous accounting scandals which have resulted to collapsing of once strong organizations. The importance of having high ethical standards in accounting is indispensable since accounting information is vital to shareholders, financiers and potential shareholders in a company(Boatright, 2010).

Failure to adhere to these accounting ethics has resulted to numerous accounting scandals. Majority of these scandals are orchestrated by selfish and greedy persons whose interest’s supersedes the interest of the organization. They usually happen when the stipulated accounting rules and principles are not followed in an attempt to cover embezzled funds. Some of the most recognized accounting rules and principles are contained in the IFRS, GAAP and FASB.

Example of accounting frauds can be unearthed in the Livent Inc. case study. As it is the case in most accounting frauds, fraud in Livent Inc., which was a leading company in theatrical production, was masterminded by Garth Drabinsky and Myron Gottlieb. These two greedy leaders were the architect to the collapsing of this giant in theatrical production.

From the case study, it is evident that these two leaders were tyrannical and abusive to their subordinates which played a great role in ensuring that the fraud remained a top secret. It is also evident that the leaders are self-centeredand single minded. The two leaders had engaged in rapid expansion projects and ever increasing in sumptuous design of the company. As a result, the company was forced to borrow more from banks and other lenders to sustain its operations. Due to all these expenditures which were difficult to maintain, it became inevitable for the executives to find ways of solving the problem. This forced them to engage in various frauds as was later discovered by SEC.

One of the major frauds as depicted by the SEC was that the two leaders instructed their accountants to manipulate the company’s financial statements.  These manipulations included but not limited to erasing expenses and liabilities in every quarter of the year. This would create a ‘rosy’ picture of a healthy financial position which was not the case(Jones, 2010).

Drabinsky and Gottlieb were also accused of having a large kickback scheme. This was a scheme whereby two vendors would siphon a lot of million dollars from the company. The company would also receive invoices for services not rendered which would siphon more money from the company. It is understood that the two greedy leaders had siphoned over $7 million in period of four years.

Drabinsky and Gottlieb were also accused of orchestrating transfer of preproduction costs from a currently running show to a show still in production. This is in contravention with accounting principal that states that accruals should be recorded as they are due. By so doing, the users of financial information will not get the actual financial position of the company. This forced the company to defer amortization of major costs. In order to reduce amortization charges, the company’s accountants started charging preproduction costs in fixed assets accounts.  This is a gross contravention of the accounting principles of double entry.

It is also understood that the company’s accountants were also instructed to debit salary expenses and other operating expenses to the long term fixed assets accounts. This is a contravention of the accounting principles since expenses cannot be treated as fixed assets. As a result of this misrepresentation, a false balance sheet for the company will be depicted this may have detrimental effect to users of financial information of the company. SEC also revealed understated expenses of more than $30 million in 1990s(Duska, 2007).

In order to sustain the increase in the activities of the company and embellish the position of the organization, it was unavoidable for the company’s top executive to derive new ways of generating funds. The two executives designed fraudulent revenue generation scheme which would indicate that the company’s earnings would sustain its operations. These dubious income generating schemes involved sale of production rights to third parties(Silverstone &Sheetz, 2007). Example of such sale involved Texas-based Company where the sale of Ragtime and Show boat which helped them to earn around $ 11.2 million. Such dealings were also accompanied by secret agreements which ensured that the company was guaranteed of not making losses. SEC reported that around $34 million in revenues were collected and recorded in 1996 and 1997 financial statements (Jones, 2010).

The last scams reported by SEC involved inflating reported box office results for key productions. This is in contravention with the accounting principle of full disclosure. This resulted in gross misrepresentation of the financial statement of the company. These misrepresentations were further orchestrated by inflating the pre-tax profit of 1992 which were listed as $2.9million instead of $100,000. SEC also revealed that this misrepresentation also recurred four years later when they reported a pre -tax profit of $14.2million instead of a loss of $ 20 million. It is an obligation of the company’s auditors to put mechanisms in place to prevent further scams such as the software developed in Livent Inc. it is also important to discipline perpetrators of accounting scandals.

REFERENCES

Boatright, J. R., 2010. Finance ethics critical issues in theory and practice. Hoboken, N.J.Wiley.

Duska, R. F., 2007. Contemporary reflections on business ethics. Dordrecht, the Netherlands: Springer.

Jones, M., 2010. Creative accounting, fraud and international accounting scandals. Chichester:John Wiley & Sons.

Silverstone, H., &Sheetz, M., 2007. Forensic accounting and fraud investigation for non-experts (2nd ed.). Hoboken, N.J.: Wiley.

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