Corporate Culture Accounting

Corporate Culture & Accounting
Corporate Culture & Accounting
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
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.
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
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
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
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.
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.
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.
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-
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-
Sandford, N. (2015). Corporate culture: The center of strong ethics and compliance. The Wall
Street Journal,
Wong, P. T. (2002). Lessons from the Enron debacle: Corporate culture matters! Retrieved
October 18, 2017, from International Network on Personal Meaning:

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