Nowadays, accounting code of ethics has become a social focus. When considering how to enhance auditors' ethics, we cannot overlook the influence of corporate culture on accounting ethics. Numerous academic literatures support the view that corporate culture is the soul of corporate management, thus a positive and gracious culture has essential impacts on ethic construction of accounting firms. Refer to the issue raised by the collapse of Arthur Andersen, it is no doubt that Andersen's changed culture lead to its demise. Actually, the culture of the leading accounting firms had changed.
In the early 20th century, many accounting firms experienced great development by economic boom. In the instance of Arthur Andersen, the firm only consisted 2 partners and 54 employees in 1920, but it had grown to 7 partners and 371 employees in ten years, its annual income also increased by more than 1.6 millions dollar (Niece & Trompeter 2004, p. 185). According to Wyatt (2004), at that time, these firms were headed by a leading accounting professional who had promoted to the top of the firm based on extraordinary technical skills and experience in accounting area. Reputations were gained mainly on accounting firms' stance on the interpretation of accounting standards. Thus being tough on accounting standards was the foremost of character of a accounting firm's success. Especially in 1950s and 1960s, professionalism and accounting code of ethics were still the main focus of accounting education, nearly all large accounting firms' new hires were recent college graduates who majored in accounting and had been taught the importance of professional responsibilities and ethics behavior. In addition, it is necessary for staff personnel to notice top managers of 'any observed behavior that departed from firm's policy'. (Wyatt 2004, p. 46) In general, the culture of accounting firms in early decades of 20 century is rich in academic atmosphere and tough on accounting standards. Moreover, the relatively small size of accounting firms enable staff personnel felt more comfort in expressing their concerns to any superiors within the firm.
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From 1960s to 1990s, non-audit services provided by accounting firms became a growing component of revenue streams. For example, 'by 1990, consulting fees valued to 44% of total gross fees for Andersen and ranged from 20 to 25 percent of total gross fees for the other Big Six firms'. Then, the audit market was becoming largely saturated in the early 1970s and auditing became subject to extreme fee pressure. (Zeff 2003, p. 269-270) The evolution of the growth in consulting services and the significant impact that consulting personnel had on changing the internal culture of the accounting firms was a profession-wide phenomenon and led to the demise of Andersen. The focus on professionalism diminished, and the focus on revenue growth and increased profitability sharpened. Greed became a force to contend with in the accounting firms. Therefore, the cultures of the firms had gradually changed from a central emphasis on delivering professional services in a professional manner to an emphasis on growing revenues and profitability.
What do you think were the causes of the change?
In 1990s, new personnel who lacked a background that placed prominence on accounting professionalism gradually gained increasing influence in accounting firms. Thus the consulting arms were rapidly growing and were gaining higher compensation levels than the audit and tax partners. As a result, the leaders of the audit and tax practices felt increasing pressure to grow revenues rapidly and, more importantly, to grow profit margins in their service areas. Therefore, it can say that the cause of the change in culture it is because managers' of accounting firms became overreaching and greedy. They regularly pressured accounting firms to accept accounting practices that, in retrospect, were clearly outside the intent, if not the actual provisions, of the existing standards. Security analysts were pressuring clients to show growth, and these clients too often leaned unduly on their auditors to accelerate revenue recognition and to delay expense recognition. However, probably none of these groups thought at the time that it was being greedy. (Wyatt 2004)
In addition, Wyatt (2004) provided that: 'it wasn't that consulting personnel were unprofessional, it was that their actions and behaviour were far more commercially driven than would be acceptable for audit personnel'. The consultants did not focus on investor or creditor interests, and their attitudes gradually affected how auditors approached their work. Thus, auditors became more willing to take on additional risk in order to maintain their revenue levels. An important element in the firms drive toward profitability involved placing pressure on partners to generate more revenue by securing new audit clients and retaining existing ones, and, for audit and tax partners in particular, to cross-sell consulting and other audit services. The consequences of not meeting income targets were various, including, at the extreme, dismissal. This is hardly a climate compatible with audit partners believing they should (or could) stand up to clients on questionable accounting and disclosure treatments. In early years, firms dismissed underperforming client partners or reassigned them to non-client tasks typically because they failed to adhere to professional and technical standards, not because of a failure to bring in sufficient business. Because of the heightened pressure placed on them in their firms, more audit partners left their firms and headed for financial positions in business. (Wyatt 2004)
Always on Time
Marked to Standard
What is the link between the issues raised by Anderson-Gough et al (2000) and your answer to Part (a) above?
The article provided by Anderson-Gough et al (2000) is focusing on professional socialization in accounting firms. Socialisation is the formal and informal processes that help people to become a successful member of a company by showing appropriate behaviors. Anderson and his partners' analysis based on recruitment literature, appraisal documentation, and qualitative interviews with over 70 trainees of two accounting firms. They explored the patterns of professional 'self identity' development, by observing trainees who identified client services as a essential field of professional and organizational discourse and the modelling of behavior and beliefs within the firms. And they found that client discourse is a central part of work, which especially include power-effects, time-keeping, appearance and conduct. In a word, client discourse support accounting firms' internal managerial controls, but lessen independence and code of ethics, and sacrifice family (especially female trainees), friends communities and sparetime activities. However, client discourse compensates trainees by higher identity and material. (Anderson-Gough et al 2000, pp. 1171-1172)
Refer to the link between what have been provided in part (a) and Anderson's research, the article indicate: while large accounting firms developed a strong commercial code of ethic, accountants or trainees who want to progress in their career must choose corresponding value option. (Anderson-Gough et al 2000, p. 1163) Because clients' satisfaction level and their retention are so important in accounting firms' culture, thus accounting trainees' socialization are strongly focus on satisfying clients' expectation, for example, overwork to avoid missing deadline, and make client happy. As a result, their socialization are less focus on self-interest and public service, however, is on to meet clients' needs and wants, even violate to current accounting standards. Provided the market is saturation, losing any client may result in accountants lose their jobs and careers.
Wyatt (2004) made a number of recommendations to redress the issues raised in his essay. In your opinion:
Have any of these recommendations been adopted? Explain (support your answer wherever possible).
Has the accounting profession (accounting firms) learned its lesson from past events? Explain (support your answer wherever possible).
(10 marks up to 1000 words)
Part (c) is an opinion-based question, therefore, you may rely on personal experience beliefs/view or judgments to answer this question. Other approaches may include examining websites or interviews with members of the accounting profession. In other words, you have complete discretion to decide your approach to answering this question. Whatever the approach, it is important that you justify your answer, whether it is judgemental or evidenced based.