Breachof Accounting Ethics: SNC-Lavalin Group Incorporation
Breachof Accounting Ethics: SNC-Lavalin Group Incorporation
Accountingprofessionals working for both private and public corporations shouldremain loyal and impartial to ethical guidelines when preparing orreviewing financial records of their firms. The breach of accountingstandards and provisions has emerged as one of the major challengesfor many organizations in the recent past. The increase in the numberof breaches of accounting ethics is consistent with the increase inthe number of organizations. In most cases, breaching of accountingethics is caused by pressure from organizational management, omissionof financial records, and the effect of greed (Lister, 2014).Breaching of accounting ethics affects the performance of theorganization and its stakeholders. Business ethics focuses on moraland ethical principles that govern the business environment. Thispaper will address the breach of accounting ethics in SNC-LavalinGroup Incorporation with the main focus on whether the currentbusiness environment is conducive to ethical behavior, a descriptionof ethical issues in the CECC, how the breach was detected, accountsimpacted, and measures that should be taken to prevent the breach inthe future.
Ethicalbehavior in the current business as well as regulatory environment
Untilrecently, the business and regulatory environment provided a fertileground for unethical practices to thrive. Organizational managementcould be secured by corporate veil, claim ignorance, and eschew theirpersonal responsibilities for different cases of organizationalmisconducts (Ebersole, 2013). In such an environment, transparency,honesty, and responsibility disappeared and organizational managersand employees hesitated from speaking the truth. Employees and juniormanagers feared firing and other forms of retaliations from thesenior managers and the business environment forced them to adopt thecode of silence irrespective of whether they were faced with glaringethical, legal, and financial crisis. However, the current businessas well as regulatory environment has addressed most of the issuesthat facilitated the culture opaqueness. This has been achievedfollowing the increase in the number of scandals (such as the Enronscandal) that threatened the going concern of different corporationsand reduced the trust of the stakeholders.
Althoughthe present regulatory and business environment, many not be termedas a perfect one, different government agencies have put in placemeasures to contain the escalating number of accounting ethicsbreaches. For example, the formulation of the Sarbanes-Oxley Act inthe post Enron scandals has ensured that all organizations makesufficient and reasonable disclosure of their financial statements,which has increased transparency in the field of accounting andfinancial management (Coates, 2007). The act also placed directaccountability and responsibility of any breaches on the corporatechief financial officers, who were previously shielded from suchmisconducts. From this example, there are four major characteristicsof the current business environment that indicate that it isconducive for ethical practices. These characteristics include theconsideration of ethical behavior as a requirement instead of beingheld as an option ethics are presented in daily interactions withboth external and internal stakeholders promotion of ethics from thetop and promotion of organizational culture that support the notionthat the code of ethics should be observed by everyone (Ebersole,2013).
Descriptionof the organization and accounting ethical breach
SNC-LavalinGroup Incorporation is an engineering and construction company thatwas founded in 1911 (SNC-Lavalin, 2014). The company was started inCanada, but it currently operates in about 41 countries in differentcontinents. The company provided engineering, construction, andprocurement management services to different clients who mainlyoperate in mining, environmental, and infrastructural developmentindustries. SNC-Lavalin Group Incorporation has now diversified itsservices, which has allowed it to combine engineering andconstruction services with maintenance, operations, and financingservices to provide an end-to-end approach in all projects. Althoughthe company has an ethics and compliance policy, a recent breach ofaccounting ethics gave it a negative image to the public. The scandalhas been characterized by two factors. First, the chief executiveofficer of the company approved irregular payments to agentsallegedly contracted by the company (Lemer, 2012). Secondly, thecompany executives misallocated costs totaling $ 56 million inconnection with irregular payment to agents. These actionsdemonstrate the vision of the code of ethics that governs accountingprofession. The scandal resulted in drastic changes of management anda decline in investors’ confidence in the company, which resultedin a decline stock price by 5.1 %, income by 18 % in the followingfinancial period (Lemer, 2012).
Detectionof the ethical issues
Thescandal was detected following an internal investigation thatrevealed the misallocation of costs and irregular payments made toagents. There are two factors that demonstrate how the management ofSNC-Lavalin failed to provide an environment for ethical practice toprevail. First, the management operated with material weakness withinits internal controls that were expected to oversee financialreporting. The management admitted that the company internal controlswere not sufficient to guide a free and fair representation of itsfinancial positions (Lemer, 2012). Secondly, the scandal wasperpetrated by the senior management without the knowledge of otherlevels of management, which means that the organizational managementhad failed to emphasize on collaboration and communication, bothupwards and downwards. In such an environment, it was possible forthe senior management to conceal its unethical practices.
Accountsimpacted and accounting guidelines violated
Thescandal resulted in publication of financial reports thatmisrepresented the true and fair financial position and statement ofincome of the company. This is because misallocation of costs in theincome statement would also affect the value figure transferred tothe statement of financial position, thus giving an incorrectfinancial position as at the end of financial year 2012. Themanagement violated several sections of IFRS (including section 9)and ISA (including sections ISA 1.81 A and 1.81 B) that requireorganizations to disclose all items (including profit and loss costof sale, and all types of revenue) of the profit and loss statementcategory wise (EYGM, 2014). In the present case, SNC-Lavalin themisallocation of costs and failure to disclose the payments made toagents is an unethical practice.
Measuresto prevent an ethical breach
TheSNC-Lavalin scandal was caused by weaknesses of the internal controlsand its recurrence can only be prevented by strengthening internalcontrols. There are two types of internal controls that can helpSNC-Laving in detecting and preventing fraud in the future. First,the company should prepare fiscal procedures and policies in writingand get the approval of the board of directors. These policies andprocedures should address issues of cash disbursement, use of agencyassets, petty cash, and purchase guidelines among others (Sullivan,2014). This will prevent the authorization of irregular payments bypart of the management. Secondly, the company should discourageparty-related transactions and ensure that agencies compete for alltasks to be sub-contracted competitively. This will prevent theallocation of sub-contract, even to dummy agencies.
Breachingof accounting ethics has emerged as a major challenge fororganizations operating in the modern business environment. However,adequate measures have been put in place to ensure that fraud isdetected and prevented at an early stage, which makes the currentbusiness environment suitable for ethical practice. The SNC-LavalinGroup Incorporation scandal resulted from the weakness in firm’sinternal controls, which means that such as scandal can be preventedin the future by strengthening internal controls. Although thecompany took the necessary measures (such as change of topmanagement) to handle the scandal, it impacted the company in anegative way by leading to a reduction in its stock price and annualrevenue. The case suggests that strong internal controls can help thecompany in complying with accounting guidelines, which will in turnreduce the chances for the occurrence of fraud.
Coates,C. (2007). The goals and promise of the Sarbanes-Oxley Act. Journalof Economic Perspectives,21 (1), 91-116.
Ebersole,G. (2013). Ethical:Business ethics must be presented, preserved, and promoted.Lancaster PA: Embesole Associates.
EYGM(2014). InternationalGAAP disclosure checklist.London: EYGM Limited.
Lemer,J. (2012). SNC-Lavalinhead resigns over breach of ethics.London, UK: Financial Times.
Lister,J. (2014). Ethicalissues facing the accounting profession.Santa Monica: Demand Media.
SNC-Lavalin(2014). Corporateprofile.Montreal: SNC-Lavalin Group Incorporation.
Sullivan,T. (2014). Topten internal controls to prevent and detect fraud.New York: Office of Mental Health.