Introduction
Proper governance mechanisms aid an accountant in determining whether financial statements present a firm’s financial performance and position. Therefore, financial statement fraud emerges when income reports are used to conceal a company’s true financial state or to disguise specific fraudulent acts. Financial statement fraud can take many forms but is commonly referred to as ‘cooking the books.’ Financial statement fraud can occur in any company, such as FTE Networks Inc., due to various accounting ethics violations.
Background
FTE Networks Inc. (FTE) was a publicly traded telecommunications company with offices in Naples, Florida, and New York. FTE’s common stock was traded on the NYSE American market from December 14, 2017, to December 17, 2019 (Hamilton, 2021). After that, the “Securities and Exchange Commission” (SEC) accused FTE Networks, Inc.’s former CEO and CFO of inter accounting fraud on July 15, 2021 (Hamilton, 2021). As a result, I chose to investigate FTE’s financial fraud because it involved violations of several accounting ethics. Some of the purported ethics involved skewing the company’s revenues for particular periods by up to 108% (Hamilton, 2021). In addition, it also involved misappropriating millions of dollars of corporate money for personal use and disguising the issuance of nearly $23 million in convertible bonds by the then-NYSE-listed explicitly company.
Ethical Violations
According to the SEC allegation, Michael Palleschi and David Lethem, FTE’s former CEO and CFO, were the major participants in the violations from 2016 to 2019 (Hamilton, 2021). They instructed the company to release nearly $22.7 million in convertible debt with short maturities, high-interest rates, and real economy conversion formulas for converting into FTE shares on demand or insolvency (Hamilton, 2021). After that, Palleschi and Lethem took a few steps to cover the notes and conversions.
Ethical Violations: Responsibilities (Internal)
Internal ethical responsibilities of accountants include confidentiality, whereby they are the main custodian of sensitive fiscal information, intellectual property, trade secrets, distribution lists, and employee details (Kiradoo, 2020). Accountants should be humble, though, assertive and persuasive in accordance with professional behavior. During the FTE Networks Inc. financial fraud, the internal stakeholders were affected negatively as the violation pertaining to confidentiality was involved. The stakeholder’s value and liquidity were decreased due to the company’s huge financial loss record.
Ethical Violations: Responsibilities (External)
The ethical responsibilities of external accountants and stakeholders involve performing all professional responsibilities with integrity to broaden and maintain public confidence. Therefore, the FTE Networks Inc. financial statement fraud affected the external stakeholders through loss of international and economic reputation and the degradation of faith in government (Kiradoo, 2020). The NYSE American staff excluded the company from the American stock exchange, which was a huge drawback to the shareholders.
AICPA Codes of Professional Conduct
The AICPA Code of Professional Conduct binds ICPA members, and rule 201 mandates that members render professional services competently (Duska et al., 2018). Some of the AICPA codes include objectivity, honesty, competence, and complete disclosure of conflicts of interest. Michael Palleschi and David Lethem, for instance, broke “section E.T. 53 – Article II – The public interest,” which reads that “Members shall embrace the obligation to behave in a way that will serve the public interest, honor the public trust, and exhibit devotion to professionalism (Duska et al., 2018).”
Ethical Violations: AICPA Codes (Independence)
The SEC outlines ‘independence in fact’ and ‘independence in appearance’ as two distinct yet equally important factors in establishing the auditor’s objectivity and integrity (Hamilton, 2021). Long-term financial market harm from independence violations would result from the loss of integrity in auditor independence, resulting in higher capital costs for all users. Therefore, accountants practicing in public should be independent in fact and appearance during the provision of attestation services and auditing. Being independent helps the auditor maintain high esteem and professional autonomy.
Ethical Violations: AICPA Codes (Integrity)
Regarding financial integrity, Michael Palleschi and David Lethem did not uphold the values and ideals of the FTE company. Through the misappropriation of millions of dollars from the corporation for personal use, they broke the integrity principle. FTE Networks, Inc. runs its business ethically and morally and follows laws and regulations. In terms of financial integrity, the company is dedicated to correctly and honestly recording all business transactions following widely accepted accounting principles.
Ethical Violations: AICPA Codes (Objectivity)
The stakeholders and professional accountants failed to preserve objectivity in FTE Networks Company by providing the public with false financial reports. Objectivity in accounting is the concept that states that financial statements should be objective (Duska et al., 2018). The principle aims to prevent management and accountant viewpoints from impacting how financial statements are prepared at any particular moment. As a result, the FTE financial statement fraud participant lacked objectivity as they manipulated the company’s financial statements for personal gain.
Ethical Violations: Implications (Legal)
From a legal perspective, the former CEO and CFO of FTE Networks Inc. may have been involved in unethical behavior for various reasons. One reason is that corporate executives’ pay directly correlates with the business’s financial performance. Therefore, they have a direct motive to present a positive view of the financial health of the FTE company to satisfy the stated performance standards and increase their salary.
Ethical Violations: Implications (Social)
From a social perspective, investors find it unusual to spot financial alteration due to the relation between the independent auditor and the corporate client. For example, the corporate auditing landscape in the U.S. is dominated by the Big Four accounting firms and a variety of smaller regional accounting companies (Duska et al., 2018). Although these organizations are promoted as independent auditors, the firms have a clear conflict of interest because the companies they audit frequently pay them many above-average salaries.
Ethical Violations: Implications (Economic)
From an economic perspective, accountants can involve in financial fraud due to self-interest. Self-interest in accounting is whereby the auditors take ethical responsibilities to work to achieve personal happiness (Duska et al., 2018). Therefore, top executives and accountants in a company can decide to misappropriate the firm’s funds to place themselves in a luxurious lifestyle. In addition, FTE Networks Inc. Financial statement fraud participants were alleged to misappropriate the company’s money to purchase expensive cars and houses.
Ethical Violation: Code of Ethics
The FTE Code of ethics is designed to meet the standards of “NYSE, Section 406 of the Sarbanes-Oxley Act of 2002” and any regulations and rules of the SEC (Hamilton, 2021). It presents procedures for reporting unethical behavior, offers direction to all employees to help them recognize and handle ethical issues, and promotes a culture of honesty and accountability (Duska et al., 2018). Therefore, Michael Palleschi and David Lethem’s claim of financial statement fraud represents a violation of the FTE accountability and honesty culture. Some of the violated components of the code of ethics include providing accurate, complete, objective, relevant, timely, and understandable information to ensure full, fair, accurate, timely, and understandable disclosure in reports and documents.
Conclusion
Financial statement frauds have been of common occurrence in most of the big companies globally. It involves the manipulation of the company’s financial statements either for personal benefits or intending to present the firm with a stable financial position. A firm’s management, including the CEO and accountants, may be forced to manipulate the company’s monetary statements to attract more shareholders. The FTE financial statement fraud involved the violation of several accounting ethics such as responsibility, integrity, and objectivity.
References
Duska, R. F., Duska, B. S., & Kury, K. W. (2018). Accounting ethics. John Wiley & Sons.
Hamilton, B. (2021). SEC charges former CEO and CFO of FTE Networks, Inc with Accounting Fraud. Hamilton & Associates Law Group, P.A. Web.
Kiradoo, G. (2020). Ethics in accounting: Analysis of current financial failures and role of accountants. International Journal of Management (IJM), 11(2), 241-247. Web.