The following is the author's contribution to a group paper submitted on December 12, 2012 for a class assignment in an accounting course. The author is currently pursuing a master of science in management degree from Cardinal Stritch University in Milwaukee.
Honest Accounting in the Best Interests of All
In remarks made before the NYU Center for Law and Business in New York on September 28, 1998, Arthur Levitt, then-chairman of the U.S. Securities and Exchange Commission, made a simple yet profound statement while discussing the long-term dangers of accounting tricks performed by companies both large and small, an observation that many seem to forget. He stated, “Our mandate and our obligations are clear. We must rededicate ourselves to a fundamental principle: markets exist through the grace of investors” (Levitt, 1998). Taking that statement from the chairman further, it can be argued that we are all investors – creators and sustainers of markets. Markets – whole economies – cannot exist without human beings. Therefore, each and every one of us is an economic actor. It is human beings that drive up the demand and value of raw materials, finished goods, and services – and vice-versa; that open bank accounts and invest in the stock and bond markets so that other individuals, as well as businesses and organizations, have the infusions of funds they need in order to go out into the world and drive innovation, make their own purchases, and ultimately create or help sustain jobs; that buy groceries, clothing, and an endless variety of consumer and dry goods at stores, which creates and sustains jobs starting at the storefront and reaching back through an infinite line of distributors, suppliers, and manufacturers; and that create entire new industries and niche markets through their hobbies, interests, and talents. Every dollar received by, and spent by, every human being, represents an investment of some kind.
Therefore, it truly is in the best interests of companies to conduct their accounting practices with the utmost integrity and transparency, for we as a society all have a vested interest in the success of a company, whether we are direct stockholders in a company or not. We are all actors and beneficiaries in the same economy, an economy that is becoming increasingly globalized and interconnected. In order to maintain a strong economy, then, with high levels of consumer confidence and money continuously transferring hands, companies need to be honest in their financial dealings. If they can do that, the long-term rewards will be great for everyone. If they cannot do that, and eventually find themselves in a situation where they may potentially fall as a result, jobs and sales are lost, and that is not good for anyone. As Levitt (1998) warns in his remarks:
For corporate managers, remember, the integrity of the numbers in the financial reporting system is directly related to the long-term interests of a corporation. While the temptations are great, and the pressures strong, illusions in numbers are only that—ephemeral, and ultimately self-destructive…relying on the numbers in a financial report are livelihoods, interests and ultimately, stories: a single mother who works two jobs so she can save enough to give her kids a good education; a father who labored at the same company for his entire adult life and now just wants to enjoy time with his grandchildren; a young couple who dreams of starting their own business. These are the stories of American investors (Levitt, 1998).Sadly, it seems that the chairman’s words of wisdom have gone unheeded. These remarks were given in 1998. 2001 saw the collapse of Enron due to fraudulent accounting practices, and 2008 bore witness to a number of corporate downfalls in the financial services industry, which sent shockwaves throughout world markets and led to “The Great Recession,” the effects of which are still being felt today.
American Accounting Association. (1998). The numbers game: Remarks by chairman arthur levitt securities and exchange commission. Retrieved December 11, 2012, from http://www.aaahq.org/newsarc/pr101898.htm