The Role Of Ethics And Judgment In The Production Of Financial Reports - Assignment Example

The role of ethics Name: Course: Course code: Tutor: Date: Introduction Accounting ethics is one of the major fields of applied ethics and involves the study of ethical values and judgments that apply to accountancy and financial reporting. It is one of the areas of professional ethics. Luca Pacioli first introduced them, and later adopted by government groups, professional organizations, and independent companies (Smith 2008). The subject of financial and accounting ethics are mostly taught in accounting courses in universities as well as by companies training auditors and accountants Due to collapses of various corporate organizations and accounting services, a lot of attention has been currently drawn to ethical standards acceptable within the accounting and financial occupation. The collapses of these organizations have led to a widespread disregard for the reputation of the finance and accounting profession. In order to stop fraudulent accounting and manage the criticism, several accounting organizations and governments have designed remedies and policies for improved ethics among the accounting profession (Blake 2004). Role of ethics in the production of financial reporting The work done by auditors and accountants requires a high level of integrity, especially during financial reporting. The company’s shareholders, potential shareholders, and other users of the financial statements rely heavily on the annual financial statements of the company since they utilize this financial information in making up to date investment decisions. They rely mostly on the information offered by the accountants who formulated the financial statements, and also on the auditors who audited the information, to give a fair and accurate picture of the position of the company. With enough ethical information, both the auditors and accountants can deal with ethical dilemmas, which assist them in making the right choices that, although it may not benefit the company, it may be of great help to the entire public who relies on the reporting practices of accountant and auditor's (Duska 2003). Ethics in accounting has been regarded as too difficult to manage since accountants and auditors have to put the interest of the entire public first (which majorly relies on the information collected by auditors) and also making sure that they are still employed by the organization they are auditing. They must put into consideration ways of applying the accounting standards even during the time they are facing ethical dilemmas that could make business to be terminated or even suffer a considerable loss. Due to various accounting scandals in the accounting profession, accountant’s critics have affirmed that when asked by a customer the sum of two plus two, the accountant may respond "what would you like it to be?" This belief alongside other critics of the profession's matters with conflicting interest, have led to many increased professionalism standards while laying emphasis on ethics in the place of work (Chilton 2006). Causes of accounting scandals Fraudulent accounting arises as a result of several issues. These issues may finally be exposed and can damage not only the reputation of the auditors but also of an organization for concealing or not discovering the misstatements. Various studies propose that a firm’s corporate culture also to its core values may change an accountant’s behavior negatively. This environment may heighten the degradation of ethical standards acquired from higher institutions. Until late 1970’s, rules of ethics barred auditing and accounting organizations from making advertisements to customers. When the rules were changed, advertising costs of the leading CPA firms rose from US$5 million during early 1980s to more than $100 million in 2000. Critics claimed that by allowing the organizations to advertise, the business side infringed the professionalism, which leads to a conflict of interest. This focus resulted in the introduction of fraud and allowed the organizations offer services that were more of business consultants and advisers instead of auditors. Other problems arose at the time when various accounting organizations lost interest in poor-paying audits as they put much of their focus on well-paying services like consulting. This discount for inadequate time spent on auditing practices led to a lack of attention to fraudulent accounting. According to Hoffman (2000), some of the leading factors that contributes to accountants’ ethical failures include (in order of significance): lack of moral sensitivity, ill self-interest, failure to maintain independence and objectivity, poor professional judgment, inability to endure advocacy threats, incompetency, poor culture and leadership, lack of support from the organization and peers, and lack of support from professional bodies. Self-interest, being the major factor, is an accountant’s motivation to act in his best interest or when facing a conflicting interest. For instance, if an auditor has a problem with an account he is auditing but is getting financial inducement to overlook these issues, the auditor acting unethically How Ethics Affects the Financial Results of an organization According to the Ethical Investment Research Service, organizations with strong ethical identity are most likely to uphold a higher level of stakeholder satisfaction, which positively affects the company’s financial performance. On the contrary, lack of personal and professional ethics may lead to negative financial results, as recently seen by the collapse of Wall Street companies. Dubious business practices and risky loans put many insurance and banking firms in an uncertain position. Ensuring ethical financial behavior at your organization assists in the improvement of the economic performance of your company (Accountants 2009). Ethics Authenticates the Return on Investment. Whether an organization relies on venture-capital funding, has outside investors or reinvests its profits, keeping right records is necessary for its long-term success. Announcing large profits from fraudulent accounting result to issues that finally hurt the financial performance of a company. Ethical business practices assist companies evade negative financial consequences and legal problems that happen once upon the discovery of unethical behavior. These practices also help organizations in providing a constant return on investment as they continue to focus on operating efficiently and effectively without the disruption of negative press and public perception, affecting business (Johnsson 2005). Ethics assists in avoiding unnecessary risks that might occur in an organization. In the current capitalist society, the economy emphasizes on private ownership in a privately driven economy. Organizations exist mainly to make profits for their owners and shareholders. Profit making is the primary objective of every business. Short-term profit tends to be more significant than long-term success. With the lack of trust in the company’s management, stakeholders appear to reduce investments consequently end up affecting the organization’s growth. Several studies have proved that ethics-related news affects the company’s share price for better or worse, enlightening effects of between 1% and 3% of the share price (Duska 2003). The data has also confirmed that those organizations with an explicit commitment to doing business ethically have recorded profit/turnover ratios at 15% higher than those without such commitment. Ethical companies create accurate and honest financial statements, which offer an excellent foundation for honest and accurate tax reporting. Filing tax returns that genuinely reflect the activities saves money in penalties, legal fees, and interest if caught. In some other cases even under-reporting may tend to save you money on tax liabilities in the short run. Besides, correct financial reporting provides a clear picture of what is going on in your organization and provides the best foundation for decision-making rather than inaccurate data. According to Berton (2004), employees prefer working in organizations that treat them with respect, fairness and dignity. When organizations set up a high standard of ethical conduct, employees are aware that they will be treated well. In response, they treat their customers the same manner. Organizations with standards of customer satisfaction have more market share, generate a higher level of customer loyalty and in the long run they may repeat the business. Customers can refuse to deal with a company that causes them to be suspicious and afraid. Organizations that contribute in social responsibilities keep healthy relationships with government agencies and other businesses and are most likely to thrive in the long run. These organizations cannot be diverted by unnecessary court cases and other activities that stop from offering quality products and services that allow positive financial outcome for the company (Philip 2001). About financial performance, it has been found that those organizations with a code of ethics significantly generate more Economic Value Added (EVA) and Market Value Added (MVA) than those without business codes. Those organizations also experience less P/E ratio volatility as compared to others. This shows that have more secure investments in the longer term. Examples of case studies The One.Tel Case This is an IT company that had enlightened management techniques and had a flat non-bureaucratic structure. The company developed a billing system that was used back in 1995 that gained popularity and was adopted by several organization for their cash flow records. Nonetheless, there were a lot of serious flaws that were later discovered in the company. Some of the flaws that revealed themselves were lack of checks and balances of the system, long dependence of inadequate design and lack of forward planning and prioritization. This later became a total failure of the entire organization. There were no processes, no structures, and no controls. By end of 2000 the billing system totally crashed and the company was unable to send out any bills due to a disastrous Goods and Service Tax (GST). The company’s bills were processed three days late, most of the bills were incorrectly calculated and they needed to be reprinted. One.Tel Company landed into lots of problems in the maintenance and improvement of the billing system and the company’s bills were late 3-6 weeks behind the schedule. SATYAM Case This is a case that’s often referred as Satyam Scam which is a saga of failed ethics and corporate governance in India. The then chairman, chief finance officer and other auditors were jailed as a result of accounting and reporting fraud. Their major concern was the fear was that poor performance could result to decrease in the company’s market value which could later lead to acquisition. As a result, they colluded with the auditors (PwC) to fudge the accounts for several years. Raju, who was the chairman overstated profits and revenues, understated liabilities, overstated debtors’, and accrued interest was imaginary, paid salaries to non-existent employees – 53,000 in place of actual 40,000. Another scam also broke out where Raju & family tried to sell shares before bringing the fraud into limelight. This resulted to various consequences i.e. the company’s stock prices collapsed and the company was also suspended from New York Stock Exchange and Bombay Stock Exchange. Furthermore Satyam was charged by Securities and Exchange Commission for committing fraud by overstating its revenues Financial reporting, Ethical behavior, and performance Currently, the process of financial reporting has been under a lot of scrutiny. Financial reporting is also regarded as one of the main functions that every organization has to take care of and demands a higher standard of ethical behavior; mainly in the public markets where financial reports assists in deciding the decision of shareholders either to buy or sell the stock of the company (Popoola 2009). It is believed that the company directors have liability for producing financial reports, and the shareholder-director relationship is a typical example of an agency relationship. This kind of relationship is portrayed by the asymmetry of information: the directors are more knowledgeable than the shareholders, and to some extent, the financial reports must redress this imbalance. The success of financial reports majorly depends on the ability of the shareholders to trust the directors to tell the truth. According to a study undertaken by ICAN in 2009, different methods of unethical reporting lead to lots of problems within organizations and the economy at large. Financial reporting is meant to meet the needs of those who uses by offering relevant information to making credit and rational investment decisions and other informed judgments. Those who use the accounting information are presumed to be reasonably smart in financial reporting and business practices. Nevertheless, everyone who reads the financial statements with her/his own biases and judgment and should be willing to be responsible for her/his own decision making. The ethical boundaries needed by accounting so as to stay within is to hold accurate and honest, concise and complete reporting as the greatest function to the shareholders and to the organization. This is why organizations such as ACCA, ICAN, AICPA, SEC and FASB have been instituted in order to ensure that accounting ethics and standards are maintained to a higher level and serves the users of financial statement with complete information that supports well-informed decisions and comparisons (Frank 2008). Conclusion As mention earlier, accounting ethics has been believed to be very difficult to control since both the accountants and auditors have to consider the interest of the entire public (which relies on the information collected by auditors) as well as also ensuring that they are still employed by the company they are carrying out its auditing. They should consider how to apply the accounting standards even when faced with a dilemma that could make business to face a considerable loss or even be terminated. As a result of some accounting scandals in the profession, those who criticize of accountants have affirmed that when asked by a customer the sum of two plus two, the accountant may possibly respond "what would you like it to be?" This notion alongside other critics of the profession's issues with conflicting interest, have resulted in several increased professionalism standards while emphasizing ethics in the place of work. Reference Accountants, WS&F 2009, Storm Financial Limited , Brisbane. Bennett, B 2006, 'Rules, Principles and Judgments in Accounting Standards', Abacus, p. 189–203. Berton, L 2004, ' Ethical Standards for Accounting Practices"', Wall Street Journal., pp. 7-10. Blake, J, Ethical Issues in Accounting. , Routledge. Casler, DJ 1994, The Evolution of CPA Ethics: A Profile of Professionalization., Michigan State University.. Chilton, RC 2006, Accounting Ethics: Critical Perspectives on Business and Management, Routledge. Duska, RF 2003, Accounting Ethics, Wiley-Blackwell. Frank, R 2008, Passions within Reason”, W. W. Norton & Company, , New York. Hoffman, W 2000, Business Ethics: Readings and Cases inCorporate Morality:, McGraw Hill, New York. Johnsson, H 2005, Performance-Based Reporting. , John Wiley & Sons. Labaton, S(22" 2006, 'Accounting Ethics Panel Members Resign, Rejecting Sec Chief's Plan', Pittsburgh Post-Gazette., pp. 37-50. Philip, G 2001, Accounting Ethics – A Practical Guide forProfessionals, Quorum Books. Popoola, T 2009, Accountability, Transparency and Value for Money Audit, Rootlidge. Smith, LM 2008, "Luca Pacioli: The Father of Accounting, A&M University., Texas. Study, I 2009., Pack on Financial Reporting & Ethics: , I Publishers. Read More