Unethical accounting practices motivated by bonus incentives, pressure to obtain financing or a desire to appear successful are not always illegal, but they almost always have an adverse effect on your business. The common theme of these practices is that they sacrifice the short-term gain of apparent financial viability for long-term negative consequences.
A business owner might think he's only using his own assets when he takes business goods for personal use, such as a ream of copy paper or a pizza at the end of the night, but an employee might see things differently. The employee may see the use or appropriation of business goods for personal needs as a benefit of being an employee. Before long, the employee who witnessed the owner's borrowing has become a borrower himself and others are seeing this employee's behavior as acceptable.
If company management is unethical to the point of financial fraud, the company could be subject to civil and criminal penalties. For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages to cover their losses. Small-business owners should exercise caution, as not understanding accounting practices and standards is not a defense for fraudulent reporting. If a reasonable person believes a manger should have known about fraud in the business, this may be enough to allow the jury to side with the plaintiff.
If you operate your small business in an unethical manner, word will eventually get out. This is especially true for small businesses in tight-knit communities. In general, customers would rather shop at businesses that operate ethically, take care of their employees and support their communities. If your company does not operate ethically, this can affect the willingness of customers and suppliers to conduct business with you. Over time, this may destroy your business.
Many good employees do not want to work for a company that is unethical. Accounting professional standards require that accounting work is performed ethically and with integrity. If you pressure company accountants to behave unethically, these accountants can't uphold the standards of their profession, and they might risk loss of their license or credentials. Reputable accountants will not work for an employer who expects unethical behavior.
