Review of Accounting Ethics

Published:

Review of Account Ethics

Review of Accounting Ethics

April 27, 2014

Overview

SNC-Lavalin is an international leader in engineering, construction, infrastructure ownership, and providing operations and maintenance services. Founded in 1911, SNC-Lavalin has offices across Canada as well as an international footprint that includes offices in over 40 countries and active operations in over 100 countries. SNC-Lavalin provides EPC and EPCM services to clients in a variety of diverse industry sectors such as clean power, environment and water, oil and gas, mining and metallurgy, and infrastructure. SNC-Lavalin provides a complete concept-to-completion project approach by combining these core services with maintenance, operations, and financing solutions. SNC-Lavalin maintains rigorously high standards of health, safety, ethical compliance, and environmental protection while remaining committed to delivering quality, under budget, and on time projects to ensure the highest possible client satisfaction (www.snclavalin.com).

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Corporate Ethical Breaches

Breaches in corporate ethics in which several consultants did not complete the required code of ethics exams occurred. According to SNC human resources, despite some having signed this acknowledgement, many remain reluctant to do so because of agreements they already signed at the beginning of their contracts. It is the belief of management that in the current regulatory and business environment, the code of ethics exam is a better ideal for ethical behavior. FinancialPost.com requires that SNC-Lavalin strongly insist all its independent consultants under contract complete the ethics exam by year-end or risk losing contracts with the company. Unfortunately this request, made from an attempt to repair its reputation, has been met with indignation on the part of some consultants. They suggest this request is an attempt by SNC-Lavalin to hide the fact that the real problem lies with senior management within the company, not the consultants it conducts business with. This problem is indicative of future problems SNC-Lavalin must face if it hopes to reclaim the trust it lost (www.business.financialpost.com).

The Code of Ethics and Business Conduct suggests that SNC-Lavalin policy maintain the highest standards of ethics in the conducting of all business and relations with all parties including but not limited to the public, the media, governments, customers, shareholders, associates, suppliers, employees and directors. SNC-Lavalin’s integrity and ethical reputation remain essential elements and assets as the company seeks to sustain continued profitability. This reputation and sense of integrity ultimately rests in the hands of individuals who act on the company’s behalf, such as directors, officers, representatives, employees, consultants and agents worldwide. Therefore, each and every employee has personal responsibility for their conduct and shall be held accountable to the Code of Ethics and Business Conduct. The provisions therein are absolute and compliance with them is mandatory for all employees as a condition of their employment (www.snclavalin.com).

The Accounting Ethical Breach

The Supreme Court of Canada confirmed the legal victory of SNC-Lavalin over a Quebec regulator. The Supreme Court refused to overturn a previous ruling that allowed an SNC-Lavalin executive to share details of the Quebec securities regulator’s investigation with the company’s audit committee as well as external auditors. The high court has unfortunately decided to not hear the financiers’ appeal of the previous ruling from the Quebec Court of Appeal. It has also been reported that former employees of SNC-Lavalin have been indicated in ethical breaches such as $56 million in payments to confidential or unknown agents as well as an alleged $160 million worth of bribes to family of the deposed Libyan dictator Moammar Gadhafi. Specifically, Pierre Duhaim, former SNC-Lavalin CEO, has been charged with fraud for his alleged involvement in a $22 million scandal involving a Montreal super-hospital. The company’s accounting firm refused to approve 2012 financial information and statements if not informed as to what the AMF investigation concerned. The impetus for this was the concern this investigation might affect the share price of the company’s stock, cause unnecessary confusion in the market and perhaps lead to dramatically damaging SNC. The regulatory body was prepared to allow SNC to report, without providing details, on the state of the investigation to Deloitte, the audit committee, and its board. The Quebec Court of Appeal found that the review bureau made a reasonable decision and acknowledged the AMF failed to provide conclusive evidence of collusion (www.business.financialpost.com).

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The Impact of Organization Related to Ethical Breach

Business Week reported SNC-Lavalin’s earnings dropped in fourth quarter profits. The earnings are less than 2014 estimates because of unprofitable road projects and a slump in commodity markets. Current forecasts for SNC’s 2014 net income fall between C$2.25 and C$2.50 per share – below the average of C$2.67. SNC has reported this lowered outlook results from the continued challenges from the environment, infrastructure, oil and gas segments, and lower prices in metallurgy and mining. Stock shares fell to C$46.39 at close in Toronto, a 4.1% drop and the biggest since October. The stock fell again this year by 2.9% while at the same time the Canadian benchmark Standard & Poor/TSX Composite Index rose 4.8% (www.businessweek.com)

Directing Organizational Ethical Issues

David G. Wilkins was appointed by SNC as its Chief Compliance Officer (CCO) as a way to reinforce its renewed commitment to ethical compliance and excellence. Wilkins’ mandate upon joining SNC was to ensure the highest standards of ethical compliance and governance. Since 2008, Wilkins has successfully led Ethics and Compliance at Dow Chemical Company, a company with $57 billion in sales annually and over 53,000 employees across the globe. Wilkins also served at Union Carbide Corporation as General Counsel and at the American Red Cross as both Chief Diversity Officer and Vice-President. The change and reorganization of SNC management in specific areas will allow the successful fostering of the obligation to high standards of ethical compliance and governance the company seeks. SNC-Lavalin continues to strengthen and improve processes at all levels across the organization with a focus on positive change (www.marketwatch.com).

Management Failed to Create an Ethical Environment

With 32,000 employees and active operations in over 100 countries, SNC-Lavalin is one of the largest engineering firms worldwide. SNC’s cultivated board of directors could literally pass as a who’s who in Canadian business, with many having been members for years. Despite these impeccable credentials, allegations have been made that senior-level executives have been involved in the misappropriation of millions both at home and abroad to secure contracts as well as the cover-up of such misappropriation of funds by allocating payments to unrelated projects. Former CEO, Pierre Duhaim, has been charged by Quebec police with fraud in relation to one such misappropriation to secure a $1.3 billion contract for a super-hospital located in Montreal. In Switzerland, another executive has been indicted in connection to an investigation into a $139 million worth of payments made by SNC as part of a laundering scheme. The vice president and financial controller of the company were both already fired by SNC early this year. SNC-Lavalin has unfortunately suggested they are somehow the victim of a few rogue employees who were abruptly dismissed as soon as their transgressions came to light. The need for substantial advances to address deficiencies such as this has already been identified by the board as the company moves forward (www.macleans.com).

Accounting Guidelines Violated - Impact to the Business Operation

Investors.com found that the impact to business operations from the standards and amendments, except for specifically IFRS12, that impacted disclosures of company interests in other entities, and the amendments to IAS19 did not have significant impact upon the SNC’s financial statements. IAS19’s amendments were initially applied in accordance with Accounting Policies, Changes in Accounting Estimates and Errors, and IAS 8. The amendments to IAS19 resulted for the year ending December 31, 2012, in an increase in the net defined benefit pension cost included in selling, general and administrative expenses on the income statement, and in an equivalent decrease in actuarial losses recognized in the statement of comprehensive income arising from defined benefit pension plans and other post-employment benefits with a $0 impact to the SNC-Lavalin retained earnings. The changes made focus mainly on eliminating the expected rate-of-return on plan assets and replacing them with a discount rate applied to the net defined benefit pension liability under the amendments to IAS19 (www.investors.snclavalin.com).

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Measurement to Deter Ethical Breaches

Since the passing of the Sarbanes-Oxley Act (SOX) by Congress, which is intended to reduce such unethical corporate behavior and decrease the likelihood of similar corporate scandals in the future, all financial information must be certified accurate by top management. Furthermore, the penalties for such fraudulent financial misbehavior are far more severe. SOX also increased the independence given to external auditors that review the accuracy of corporate finances and financial statements as well as increased the role of oversight given to the board of directors (Weygandt, Kimmel & Kieso, 2012, p7). SOX encompassed several elements passed in direct response to concerns that investors be able to receive complete information about any potential cases of corporate scandal or fraud (www.soxlaw.com). SOX has benefits accounting professionals by establishing the Public Company Accounting Oversight Board that is charged with the oversight, regulation, inspection, and discipline of accounting firms as they audit public companies (www.soxlaw.com). The standard of high ethical conduct applies to all employees of SNC-Lavalin including all of its associated companies and subsidiaries around the world. Such as, if the board was aware of the material weaknesses in its corporate policies, why wasn’t action taken to prevent such unethical and damaging behavior in the first place? Recommended measures should have been put in place by the CFO to prevent such unethical behavior, and having ascertained that SOX should be utilized in the future.

References

Business Financial Post.com. “Ethics Exams.” (2014). Retrieved on Apr. 14, 2014 from

http://business.financialpost.com/2012/12/21/snc-lavalin-met-with-scorn-from-contractors-over-compulsory-ethics-exam/

Business Financial Post.com. (2014). “Supreme Court Confirms SNC-Lavalin’s Legal Victory.”

Retrieved on Apr. 16, 2014 from http://business.financialpost.com/2013/09/05/supreme-court-confirms-snc-lavalins-legal-victory-over-quebec-regulator/

Business Week.com. (2014). “SNC-Lavalin Profit Misses Estimates.” Retrieved on Apr. 16,

2014 from http://www.businessweek.com/news/2014-03-06/snc-lavalin-profit-misses-estimates-on-loss-in-infrastructure

Investors.com. (2014). “2013 Annual Financial Statements and Notes.” Retrieved on Apr. 16,

2014 from http://investors.snclavalin.com/en/investors-briefcase/doc/2013_ annual_ financial-statements-and-notes_411.pdf/

Macleans.com. (2014). “Boardroom Blunders at SNC-Lavalin.” Retrieved on Apr. 20, 2014 from

http://www.macleans.ca/economy/business/boardroom-blunders/

Market Watch.com. (2014). “David Wilkins Appointed to Reinforce Ethics Compliance.”

Retrieved on Apr. 21, 2014 from http://www.marketwatch.com/story/snc-lavalin-appoints-david-g-wilkins-to-reinforce-its-commitment-to-ethics-compliance-excellence-2014-02-24

SNC-Lavalin.com. (2014). “SNC-Lavalin: Corporate Profile and Code of Ethics.” Retrieved on

Apr. 14, 2014 from http://www.snclavalin.com/about_code.php?lang=en

SoxLaw.com. (2014). “Sarbanes-Oxley Act Section 802.” Retrieved on Apr. 24, 2014 from

http://www.soxlaw.com/s802.htm

Weygandt, Kimmel & Kieso, (2012). “Financial Accounting.”(8th ed.). Hoboken, NJ: John

Wiley & Sons, p.7.

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Week 3 Assignment 1 Submission

Apr 30, 2014 7:07 PM

170.46/200

Patricia,Good work on Assignment 1 (Review of Accounting Ethics). I enjoyed reading your responses to the requirements and your discussion of the ethical breeches of the company you selected. The points earned are indicated in your grade book. Please remember to consult my assignment grading checklist so that you can earn full credit on future written assignments. My comments are as follows:

Late submission (1-7 days - 10% deduction) -20 points

Improper or no (not in accordance with APA style) in-text references -10pts

General note: Each entry on your reference page must be cited in your paper. Citations and reference page must be in the proper APA style. Good quality references are from academic journals and some periodicals. Using Google to find articles is not good quality (e.g. .com, etc). Use the data bases in the Strayer Online Library andgrammarly to review your papers (see Tutoring on your BlackBoard area).