Case of Wespac Bank for Analyzing Accounting Ethics
The current research focuses on analyzing the importance of ethics in accounting. Accounting is associated with the calculation of financial data in an organization and therefore, ethics of the accountants help in adhering to provision of authentic and accurate data. In order to further analyze the significance of ethics in accounting, the incident of Wespac bank has been selected. The incident includes the loan approval of the bank to more than 10,000 customers, thereby, paying little attention to the expense stated by the borrowers. Thus, due to that, the bank incurred a fine of 35 million, resulting in a number of financial issues. Along with Wespac, other banks such as Commonwealth bank, AZD also faced a fall in its shares in stock market. The two models which have been selected in the current research include utilitarianism and deontology. The application of the theories show that the reluctance of the staffs has resulted in the occurrence of the issue coupled up with their lack of knowledge. The recommendations include betterment of leadership skills which would help in communicating with the employees and provide them training, thus, making them more acquainted and knowledgeable with their specific tasks and procedures.
Accounting refers to the store and management of financial data in an organization in a systematic way out of the business processes that have taken into the organizations over a financial year. The primary purpose of accounting is to foresee the status of the business the company is performing and also to report that to the relevant stakeholders of the company for better decision making process. In this regard, it is important to integrate ethics and legal entities in accounting as accountants always need to adhere to the maintenance of authenticity of the provided data and information. Thus, the purpose of the current research is to discuss the ethical and legal breaches in an organization; where the case of Wespac Bank hitting 35m has been selected. In order to further illustrate on the matter, accounting theories and models have been selected as one of the chief purpose of the current research is to critically analyze the theories and models associated with accounting.
Code of ethics in accounting
Accounting is one of the most significant professions that require the integration of ethics into the process of financial data calculation. In the opinion of Gunz and Thorne (2018), the Australian government has set out some of the ethical standards for the accountants and financers to follow. Primarily, the purpose of financial information and accounting is to let the shareholders know about the financial position of the company. Thus, the financial decision which shall be taken by the shareholders relies heavily on the financial information catered to them. Thus, in case the accountants provide inauthentic information to shareholders, the whole of the decision making process of the company shall be inappropriate.
As stated by Loeb (2015), the Australian code of ethics for the accountants state that a person who is entrusted with the task of keeping financial information and making the data ready for the related set of shareholders are termed as financial accountants. Thus, their ethical responsibility is to always perform their duties accurately and ensure that the information provided by them is true to every aspect. Moreover, as influenced by Sorensen et al. (2017), a review team is also assisted within the financial management team who is entrusted with task of reviewing the financial information provided by the team. Thus, in this regard as well, ethics is important as the review team also needs to be ethical and manage the right track of the data management team.
Legal issues in accounting
The Australian accounting standards deals with the legal principles that must be followed by each of the accountants engaged with task of managing the financial information in any of the firms operating business in Australia. According to Shawver and Miller (2017), under the Australian Accounting Standards Board, the Corporations Act 2001 has been prepared which set the legal responsibilities of accountants. It states that the chief responsibility of accountants is to abide by their duty and should perform the tasks allocated to them with great care and also maintaining the authenticity. Therefore, on the basis of that, it can be stated that the role of accountants is set by the organization that they are working in and the accountants must abide by each of the clauses set by the company. On the basis of this it can be stated that the first legal issue associated with accounting is the breaching of responsibilities and duties that has been set by the organization.
Moreover, as per the AASB, it is also important that accountants remain true to the shareholders in every aspect. As mentioned by Gong (2017), the decision making process of a company relies primarily on its financial position. Thus, the only source to identify the financial position of the company is the information provided by the accountants and auditors. In this regard, it can be clearly understood that the provision of incorrect information to the shareholders associates a legal breach of their code of duty, thereby, evidencing non adherence of accountants to their roles and responsibilities. This provision of inaccurate information results in inappropriate decision making process which is determined by the false financial statement (Boyce, 2014).
Application of utilitarianism in Wespac bank case
The model of utilitarianism is associated with a majority of the business and relates to the benefits caused to the stakeholders in terms of the decisions taken by each of the individuals. As commented by Mill (2016), the decision making process associates financial decisions as well and that information is provided by the accountants. Thus, in compliance with the utilitarianism model, it can be stated that accountants must always opt for steps which are beneficial for the shareholders of the company in the long run. As opined by Mill (2015), the primary purpose of utilitarianism model is to take the decision which would constitute to the betterment and well being of a majority of the people and would also lower the adverse effects due to the decision on the people. Thus, on the basis of that, it could be understood that the decision of providing accurate information to the shareholders resulting in taking a decision which would be beneficial for whole of the company. Thus, this creates a positive impact due to a positive decision making process and comply well with the utilitarianism model.
The issue that is associated with Wespac bank is the approval of more than 10,000 home loans by the bank between the years 2011 and 2015. In terms of approving the loans, a system was used by the bank which gave the approval and thus, failed to get it approved by the manager (Barrow, 2015). According to Alon and Lehrer (2017), the loans that were given to more than 10,000 people would result in more financial risk being faced by the bank. Moreover, the accountants of the company did not rely on their legal duties as well. While approving the loans to the people, their income was analyzed without paying any precision to the expenses of the borrowers. Therefore, the application of the utilitarianism model in this regard shows that primarily the accountants and financial managers of the company did not adhere to their responsibilities and approved the loans, thereby, putting a huge burden on the bank. It was because of their reluctance that the bank decided to provide loans to such a huge number of customers, thereby, resulting in huge financial adversity of the bank. It has to pay 35 million as tax for breaching the legal entities. As stated by Liu, Schuckert and Law (2018), the shareholders of the bank faced a huge loss due to this. Henceforth, it can be clearly understood in this context that it was due to the accountants that the decision taken had a negative impact on majority of the people.
Application of deontology in Wespac bank case
The theory of deontology is also associated with the application of ethics. Thus, in accountancy, the application of ethics is of utmost importance and deontology theory shall provide the guide to ethical integration in accountancy for accountants to follow. As stated by Paquette, Sommerfeldt and Kent (2015), deontology applies some basic rules which help an individual to understand the roles and responsibilities that he needs to follow and also the rules that he must adhere to. Thus, as far as accountants are concerned, deontology shall make it obliged for accountants to always provide authentic data and abide by their duties greatly. This theory further puts the stress on Kant who is also one of the profounder of this theory. According to Chakrabarty and Bass (2015), the Kantianism version of the deontological theory states that one important aspect in determining right and wrong in a specific activity is to understand the motif due to which a person is adhering to a specific task.
In the provided scenario, it can be witnessed primarily that the members of the bank did not adhere to their roles and responsibilities that they have been assigned with. For instance, the role of the manager was to manually check whether the loans are eligible for approval. Along with that, it was also evidenced that the loan approval procedure needed to be done on the basis of the expense stated by the borrower. However, despite that factor the professionals of the bank did not perform their duties and relied on the income of the customers for the loan approval procedure. Thus, as influenced by Holland (2015), it can be analyzed in this context that the application of deontology in the provided scenario would reveal the non adherence of the individuals to their responsibilities and also lack of duty performance of each of the members. Along with that, as commented by Paquette, Sommerfeldt and Kent (2015), the Kantianism version of deontological theory puts the emphasis on the motif due to which a work is done. However, in the current scenario the primary motif of the personnel was to incur much profit from the loans and the imposition of the fine resulted due to their reluctance.
Impact of the issue on the organization
The Wespac bank in Australia had a huge contribution to the economy. However, according to Gunz and Thorne (2018), the imposition of fine on the bank off 35 million resulted in much financial difficulties being faced by the company. Along with the sufferings caused to the bank, there was impact witnessed in the stock market as well. According to Loeb (2015), a number of banks in the banking sector in Australia suffered in terms of loan procedures. The incident resulted in the loss of confidence of the investors in the banking sector. Moreover, the shares of the company fell by 3.6% from $28.15 to $27.10 (Sorensen et al. 2017). The falling of shares did not occur only to Wespec, but some of the other banks in the sectors also developed a fall in their shares. As studied by Shawver and Miller (2017), the share of ANZ fell by 2.1% and National Australia bank’s shares also fell by 2.1%. In addition to that, the shares of Commonwealth banks fell by 1.7%. In addition to that, there were new rules regulated in the sector by the banking regulators who made the analysis of the debt-to-income ratio of borrowers mandatory before the approval of loans.
Reaction of the CEO
The CEO of the bank is Brian Hartzer. After the incident took place, the CEO was accountable for the occurrence of the issue and accepted all the loopholes that were there in the banking system. Moreover, as commented by Gong (2017), he took charge to bring forth of a number of changes in the banking organization. Therefore, it can be analyzed in this context that the CEO took steps for the amalgamation of the issues in the sector and work toward the resolution of those. He also promised to train each of the employees working in the sector and to fill them with adequate knowledge on each of the processes associated with banking. Moreover, it can also be witnessed that the regulations provided by the Banking commission to follow imposed a number of financial adversities on the sector, thereby, resulting in the falling of share price of some of the most notable banks in the sector. However, as mentioned by Boyce (2014), Hartzer interrogated a number of the members in the commission. Later, they committed that they were wrong. Thus, this shows that the Commission had also some loopholes.
The primary focus that the sector should provide is to leadership and management. As far as accounting is concerned, leadership plays an important role in this aspect. Leadership skills and a good leader provide training and communicate with the employees and staff to provide them motivation. Moreover, as stated by Barrow (2015), good leadership skill also helps in identification of the issues faced by the people and taking steps for those. Thus, in the provided scenario the leaders of the bank must develop good leadership skills for understanding the condition of the accountants and the managers in the bank. Along with that, they must also be provided with training for understanding their roles properly and to abide by those.
On the basis of the findings of the current research, it can be stated that the ethics and legal policies are immensely important in accounting. Ethics include the provision of authentic information by the financers and accountants. The importance of ethics in accountancy lies in the fact that it shall be used by the shareholders to make the important decisions of the company. Henceforth, any wrong or inaccurate information shall result in formulations of wrong decisions which shall not be favorable for the shareholders in the long run. The legal policies in accountancy include abiding by the duty and responsibilities accurately that have been assigned to the accountants. However, in order to further analyze the importance and significance of ethics in accountancy, the incident of Wespac bank and imposition of 35 million on it has been selected. The two theories and models selected are utilitarianism and deontological theory of ethics. The two theories are related to ethics because ethics is one of the integral factors in accounting. The application of the two theories and models shows that the professionals in the bank did not abide by the roles and responsibilities that they had. Their reluctance and lack of knowledge resulted in the imposition of such a huge amount on the sector, thereby, resulting in falling of shares by 2.1%. Along with the bank, other banks also faced issues of share falling in stock market. The recommendations provided in the current research is betterment of leadership and managerial skill which would help in the betterment of roles and responsibilities undertaken by the accountants, thus, reflecting into sustainability of the banking sector.