Corporate Culture Accounting

Running head: CORPORATE CULTURE & ACCOUNTING 1

Corporate Culture & Accounting

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Institution

CORPORATE CULTURE & ACCOUNTING 2

Corporate Culture & Accounting

Introduction

The corporate culture is crucial in encouraging ethical conduct as well as the compliance

with the law. A weak ethical climate owing to the poor corporate culture has a high probability

of leading to violations relating to a wide range of activities including environmental, labor,

financial as well as other aspects of an entity. An entity’s failure to abide by the laws across a

gamut of organizational issues may be an indication of a culture that is not keen to regulatory

compliance. In the contemporary corporate arena, various entities have found themselves

engulfed in massive financial corruption scandals. The current multidimensional global business

environment is characterized by increased regulations to deal with the more challenging risk of

fraud and misconduct. The financial fraud scandals have the potential for material reputational

harm, and economic costs in terms of penalties, investigations and fines (Omar, Johari, &

Hasnan, 2015). Since the late 20

century, the financial statements regarding fraud’s complexity

have been given considerable attention. The financial fraud takes different forms including

deceptive accounting practices aimed at manipulating the performance of firms to make them

appear sustainable. The purpose of this paper is to examine the effect of corporate culture on

financial fraud in the accounting departments. It is guided by the question, what is the

association between the corporate governance, openness and code of ethics, and the corruption,

possible loss of assets and the fraudulent reporting?

Corporate Culture

Omar, Johari and Hasnan (2015) noted that corporate culture, especially at the top

management, imposes powerful influence on the employees’ behavior. A sound corporate culture

is crucial in enhancing strong organizational ethics. Good companies have impressive and

CORPORATE CULTURE & ACCOUNTING 3

formalized ethics and compliance programs (Sandford, 2015). Entities that want to survive in the

modern competitive business environment emphasize a culture of integrity. Through a positive

culture of integrity, entities have agreed on what they highly uphold as values and foundation of

effective ethics. A strong culture of integrity creates a competitive advantage while serving as a

valuable organizational asset.

In addition, Sandford (2015) noted that a culture of integrity had organizational values

that emphasize the company’s commitment to regulatory compliance and business ethics.

Besides, the tone at the top where the senior management encourages its business partners and

subordinates to behave in an ethical and legal manner as dictated by the policy requirements is

important. A culture of integrity also has an elaborate communication channel where the

leadership consistently issues ethics and compliance messages while also allowing the

subordinates to comfortably express their opinions. In a transparency environment that

emphasizes accountability, the top management should be ready to hold themselves and those

under them adhere to the organizational and shared values.

The Financial Executives Research Foundation, Inc. (2015) noted that an atmosphere

created by the top management is crucial in ensuring accountability in financial reporting and

will have a trickling-down effect on the subordinates. If the top management’s tone is one that

upholds integrity and ethics, then the subordinates are more likely to uphold such values. On the

other hand, where the management seems unconcerned with ethics in financial reporting or

issues directions that portray a company in a positive manner, then, they will be more inclined to

engage in frauds. Also, if the company’s culture is characterized by whistleblowing programs,

there will be zero tolerance to financial fraud.

CORPORATE CULTURE & ACCOUNTING 4

A company with a working framework for anti-fraud strategies encompassing internal

standards and procedures, and code of ethics is not likely to engage in accounting malfeasances.

All employees will execute their mandates in an organized manner while preventing fraud acts

(Sabau, Sendroiu, & Sgardea, 2013). The authors noted that among the actions to be taken to

ensure that frauds are prevented included the development of: an ethical culture as well as a

working environment that is characterized by high integrity levels; operational systems of

internal control; mechanisms of recognition of potential offenders, integration of the internal

audit function; and initialization of anti-fraud education and training for workers.

A strong ethics and integrity culture is the first step to deter financial fraud (Sabau et al.,

2013). Irrespective of the nature of the organizational structure, the executive must set the right

tone and level of ethics and integrity. The managers must understand that an ethical corporate

culture is a process where they must set an example and communicate to their workers the

organizations’ policy to fraudulent acts. Sabau, Sendroiu, and Sgardea (2013) noted that without

the management commitment and support, it was difficult for a company to achieve a culture of

integrity. If the executives’ behaviors and principles support the ideas of integrity and ethics, the

managers and subordinates will support these values.

Financial and Accounting Fraud

The Fraud Triangle can be used to better understand the concept of financial fraud.

According to the Financial Executives Research Foundation, Inc. (2015), the accounting frauds

are carried for two major reasons: misleading the investors and stealing from the company to

enrich oneself. Borrowing from the Fraud Triangle individual are motivated to engage in fraud

when: there is a perceived pressure; presence of situation or opportunity; and rationalization and

justification in the minds of fraudsters. The desire to meet or attain a given pressure such as the

CORPORATE CULTURE & ACCOUNTING 5

incentives and bonus may make the involved employees compromise the ethical standards.

Therefore, the need to attain a set financial goal make the senior managers ask the employees to

do all they can, which may give a negative tone and compromise ethical behavior. The second

factor, opportunity, to commit financial fraud exists where there are ineffective internal controls.

The top management must always reevaluate its internal controls to identify possible

weaknesses and strengths because the business environment is always changing. The assessment

of fraud risks identifies three main areas: corruption that covers illegal gratuities, bribery,

economic extortion and conflicts of interest; financial statement fraud which include asset and

revenue overstatement or understatement; and assets misappropriation such as cash and stock

among others (Financial Executives Research Foundation, Inc., 2015). Finally, the

rationalization factor of the fraud triangle arises when workers convince themselves that their

acts are not wrong or that following the seniors’ orders to fix some problems was necessary to

safeguard their jobs. A strong corporate culture is crucial in addressing the rationalization for

committing fraud by stressing on integrity, honesty and ethical conducts. A strong corporate

culture of integrity will allow employees to appreciate the consequences of their rationalization.

In an ethical culture, employees refrain from committing frauds to please the top management.

Corporate Culture and Accounting Fraud

Lovik, Merkel, Kaloski, Lovik, and Bank (2013) noted that culture is perhaps the main

risk factor leading to the compromise of integrity and compliance. An ethical culture will always

reflect the collective ethical values as well as behaviors of the company’s executives, managers

and other employees. Peery (2008) noted that unethical corporate culture had seen fraud become

a commonplace and news outlets changing their focus from marketing irregularities,

safeguarding the environment and product safety to issues of corporate governance and

CORPORATE CULTURE & ACCOUNTING 6

accounting and financial fraud. The commonly referred cases involving unethical culture and

which are linked to huge financial scandals include the Enron, Arthur Andersen Accounting,

Waste Management, Sunbeam, Global Crossing, WorldCom, Qwest, Satyam and Parmalat.

A corporate culture whose focus is on stock prices and profits leads to the creation of an

environment where employees feel pressured to secure financial performance of a firm (Morgan

& Burnside, 2014). Under such culture, the managers would be remunerated based on their

performance, making them more likely to misrepresent the true picture of the company’s position

and performance. Also, a corporate culture of centralized control, lack of transparency and

secrets offers an opportunity for clever accounting and frauds to be concealed. Also, an entity

whose directors are not independent may engage in financial statements fraud compared to

companies whose board members are majorly from outside. Additionally, an entity whose

organization structure gives the chief executive officer too much control gives them a chance to

commit financial crime. The companies with ineffective audit committees are equally likely to

engage in financial statement fraud.

To indicate how poor corporate culture is linked to accounting scandals, this paper

analyses what happened in Enron at the beginning of the 21

century leading to its death.

According to Wong (2002), the failure of Enron was a result of ethical deficiency in corporate

America. The Enron executives with the assistance of Arthur Anderson took loans through

unregulated private partnership, and hid losses to post good revenues. The existing culture

allowed the executive to persistently fail to disclose their operations to the analysts. Wong added

that following the fall of Enron, the sole and main lesson was that corporate culture matters since

it can lead an entity to a disaster or, on the contrary, to success. The executive failed to abide by

the Enron’s ethics code and instead created a culture of greed, deception and corruption. As a

CORPORATE CULTURE & ACCOUNTING 7

result, they could not cultivate a culture of trust and openness with employees. They created an

environment where the staff who questioned some of the company’s decisions and practices

were silenced or ignored. They lacked shared vision and the senior management concentrated on

the bottom line to enrich themselves.

Conclusion

It is apparent that a strong relationship subsists between the corporate culture and the

financial reporting integrity. The top management must create a culture of integrity by ensuring

adherence to the ethics and compliance programs. On financial integrity and ethical matters, the

management should lead by example. The company’s ethical goals should be clearly

communicated throughout the organization touching on all aspects. The management can achieve

this by developing strong code of conduct, and organizational policies and procedures. To avoid

financial frauds in an entity, such a code of conduct should be vigorously implemented. In

addition, the top management must always conduct education and training on ethics for future

generations. The financial fraud can also be avoided by rewarding appropriate behaviors,

especially the ethics-based performance.

CORPORATE CULTURE & ACCOUNTING 8

References

Financial Executives Research Foundation, Inc. (2015). Breaking the cycle of fraud. Washington

DC: Financial Executives Research Foundation, Inc.

Lovik, L., Merkel, E., Kaloski, D., Lovik, M., & Bank, R. (2013). Corporate fraud, Sarbanes-

Oxley and corporate culture.

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.485.7288&rep=rep1&type=pd.

Morgan, A. R., & Burnside, C. (2014). Olympus Corporation financial statement fraud case

study: The role that national culture plays on detecting and deterring fraud. Journal of

Business Case Studies, 175-184.

Omar, N., Johari, Z. A., & Hasnan, S. (2015). Corporate culture and the occurrence of financial

statement fraud: A review of literature. Procedia Economic and Finance, Vol. 31, 367-

372.

Peery, N. S. (2008). Corporate social performance: Ethics and corporate culture. 813-835.

Sabau, E. M., Sendroiu, C., & Sgardea, F. m. (2013). Corporate anti-fraud strategies- ethic

culture and occupational integrity. Cross-Cultural Management Journal, Vol. XV (2), 59-

66.

Sandford, N. (2015). Corporate culture: The center of strong ethics and compliance. The Wall

Street Journal, http://deloitte.wsj.com/riskandcompliance/2015/01/20/corporate-culture-

the-center-of-strong-ethics-and-compliance/.

Wong, P. T. (2002). Lessons from the Enron debacle: Corporate culture matters! Retrieved

October 18, 2017, from International Network on Personal Meaning:

http://www.meaning.ca/archives/archive/art_lessons-from-enron_P_Wong.htm

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