Unethical accounting practices occur when a company or an individual accountant does not follow the rules of generally accepted accounting principles (GAAP) or the rules governing accounting practices in the country of practice. Examples of not following GAAP include recognizing revenue before a customer takes physical possession of the inventory, not recognizing the expenses associated with revenue (revenue expenses) and not writing down bad inventory.
A company can inflate its sales by recording revenue for unsold stock. According to GAAP, a customer must take physical possession of the goods before revenue can be recorded in the income statement. The company can still write an invoice to the customer, but it cannot record it as a sale on its profit and loss statement until the inventory gets to customer.
Similarly, there are rules by GAAP that pertain to expenses. A company that capitalizes expenses and places them on the balance sheet instead of listing them as an expense is "cooking the books." The telecommunications giant MCI unethically recorded its revenue and expenses between 1999 and 2002. The now-defunct public auditor, Arthur Andersen, signed off on MCI's financial statements and committed fraud in the process.
Not writing down bad inventory is a way of understating a company's expenses. Bad inventory is inventory that can no longer be sold or in working condition. It is unethical to avoid writing down the expense to inflate net income and thus increase the financial performance of the company.
Other unethical Behaviours In accounting profession are:
1. Providing erroneous information which regards to the expenses incurred by a business.
2. Exaggerating the revenue of a business.
3. Misappropriation or embezzlement of business fund.
4. Providing wrong information to tax authority
5. When the same firm prepares and and also audit the financial statement of that company. This is very wrong because fraud might not be detected and it won't represent a fair view of the company's financial statement.
6. Manipulation of financial statement, also known as window dressing in accounting.
7. Using confidential information for person gain, e.g blackmail.
8. Practicing with a fake license.
PENALTIES FOR UNETHICAL PRACTICES
Any of the following penalties can be meted out to any accountant caught doing unethic practices
1. Suspension of license
2. Termination of the right of the accountant to practice
3. Expulsion from membership
4. Fines and perjury charges
5. Jail terms depending on court order.
The following are some acts regulating accounting, depending on the country.
1. Insurance act of 2003.
2. International Accounting Standard.
3. Bank and other financial institution act of 1991.
4. Company and Allied Matter Acts of 1990.
5. International Accounting Standard
6. International Financial Reporting Standard.
7. Security and Exchange Commission Act.
8. Pension Act.
9. Personal Income Tax Act.