Ethical issue in financial accounting and reporting is concerned with how the management, the board and the auditors make appropriate moral choices in their process of preparing, disclosing and presenting the financial information to the government, shareholders and other stakeholders. Over the years, a series of financial accounting and reporting scandals have been reported in some of the world best known companies such as WorldCom and Enron from United States and United Kingdom respectively (Freeman, 12). By understanding some of the unethical behaviors related with accounting, corporate governance and financial reporting individuals can be of great help in obtaining some of the actions which might mitigate the business or an organization from becoming bankrupt or failing. The research memorandum will put into consideration the ethical issues associated with financial accounting and reporting.
Ethical issues associated with financial accounting and reporting.
Fraudulent financial accounting and reporting is regarded to be the misstatement of the organization’s financial statements in a given period of time which is basically estimated to be one year (annually). The greatest scandal to be ever hand in the biggest organizations around the world is centered of fraudulent accounting and financial reporting. Fraudulent accounting and financial reporting is normally conducted by the management in order to maintain the price of the company’s shares high in the listed companies and to mislead the investors to invest more capital in the company (Dutra, 17). Although, the impact of misleading the financial accounting and reporting might boost the price of the company’s stock in the short run, it is always dangerous in the long run as the price of the company’s stock drop drastically. The short run exaggeration of the company’s stock price is usually referred to as myopic management.
The most dangerous unethical issue that occurs on individual level in an organization is misappropriation of the organization’s assets. The misappropriation of the organization assets is basically the use of the assets for other purposes rather than the interest of the company in an attempt to make profit or for person interest. The asset misappropriation is also regarded to be embezzlement or theft of the organization assets (George, 19). The misappropriation of the company’s assets might occur at any level of the organization and at any magnitude. Despite the level or the magnitude over which the misappropriation might occur it is still regarded to be unethical behavior in financial accounting and reporting.
Disclosure in financial accounting and reporting is usually regarded to be unethical when errors of omission occur. Despite the fact that errors of omission in accounting might occur, failure of the accounting officer to follow the general acceptable accounting principle during the financial reporting is regarded to be unethical (Wright, 25). In addition, the failure to disclose the relevant accounting information to the investors would lead them to making wrong decision as far as their investment decisions are concerned. Even though the disclosure omission might be on accounting level it might occur even in other levels of the management for the purpose of fraudulent financial practices.
Since the passage of the Sarbanes-Oxley Act in 2002, penalties related with violation of the accounting ethics in most organizations across the globe has increased greatly (George, 19). The unethical behavior of financial accounting and reporting in terms of information destruction and manipulation of financial records usually calls for legal protection for those regarded to be whistle blowers in an organization. Given this legal protection, individual found to have unethical behavior in financial reporting and accounting are normally held liable. Therefore, ethical behavior in financial and accounting is of essence as far as the success of the organization is concerned.
Freeman, J. What Is an “Ethical Issue” in Financial Accounting?2015. Oxford University Press.
Dutra, A. A more effective board of directors. 2013. Retrieved from: https://hbr.org/2012/11/a-more-effective-board-of-dire
George, K. Medtronic plc Principles of Corporate Governance. 2009. New York publishers.
Wright, A. The corporate governance mosaic and financial reporting quality. 2009. Journal of Accounting Literature, 87-152.