Detecting Accounting Fraud Before It's Too Late

CHAPTER 7Ethical Considerations and Economic Consequences of Manipulations

Greed is good.

—Gordon Gekko (in the movie Wall Street)

7.1 THE ETHICAL DIMENSIONS OF ACCOUNTING FRAUD

Ethics means acting according to principles that are acceptable from a moral point of view. In the past, organizations were simply asked to reach their goals and, in the case of for-profit companies, to make money. An example is the Nobel laureate Milton Friedman, who in 1970 stated, “A company's social responsibility is to increase its earnings.”

However, although many today continue to think like Friedman, society has become more sensitive to ethical issues. This is a consequence of trends like the greater diffusion of all types of information, scandals that have increased mistrust in many organizations, and the perception of companies' growing social responsibility. This increased awareness explains the increase in the number of organizations that launch ethical codes in order to promote ethics in the behavior of managers and employees.

Accounting frauds generate questions regarding its ethical dimension. There are those who question whether or not they are admissible practices. As shown in Figure 7.1, there are practices that are clearly ethical and others that are clearly unethical, but in the middle there is an ample gray zone where there is less unanimity when classifying them. When the accounting information violates the law, it is clear that it is an unethical behavior. This is also clear ...