Ethics in Financial Reporting

Accounting Ethics or Ethics in Financial Reporting is a serious issue in accounting. Different persons have different opinions regarding right and wrong in any situation or fact.

For example, an unethical work will seem unfair to anybody but this unethical work may seem fair to another one. In some companies, business managers could find themselves in positions where they feel stress to go against their personal ethics. For example, in ABC Company the manager of the utility section is accused of charging too much from customers, the purpose for doing the unfair means to rapidly achieve company goals and earn bonuses. If the moral principles will prevent the manager to do so then the principles are referred to as ethics of business. In spite of having different views among individuals, the right ethical manner will conduct behavior that will imply the impact of one’s role in society. An ethical manner will help a person go in the right way in both personal and professional life. A manufacturer of any transport company may be unable to solve the defect in order to save costs but this may lead the company to lose sales. The employees of any business enterprise should operate their business within an ethical framework. Although this ethical framework is basically based on individual experiences and training this ethical framework could be applicable to any business. There are a number of principles that form the basis for ethical behavior to apply in any business.

Since the 1920s the financial press has been occupied with the accounting scandals of Enron, WorldCom, HealthSouth, AIG, and others. For these scandals of financial reporting or accounting the mistrust of financial reporting is raging. Ethical considerations could affect everything that an accountant does in the company. Investors and creditors require appropriate and reliable information about a company for making their decision. It influences both the investment decision and credit decision. As the investor thinks that this financial Information would have no credibility or that the financial reports have not been fairly presented. A well-functioning economy basically depends on accurate and faithful financial reporting. To present reliable financial information to the public, the SEC requires companies to have their financial statements audited by independent accountants™. Regulators and lawmakers of the United States were very concerned that the economy of the country would suffer if investors lost confidence in corporate accounting and were reluctant to invest because of unethical financial reporting. In order to overcome this situation, the United States Congress passed the Sarbanes-Oxley Act of 2002, SOX whose aim is to reduce unethical corporate behavior in the business and decrease the likelihood of future corporate scandals. For implementing this act of SOX, top management becomes aware of the accuracy of financial information. These acts also lead to some severe penalties some if the management is associated with unfair means in the business or for preparing fake financial activity. The act of SOX also encourages the involvement of the independence of the outside auditors. The external auditors evaluate the accuracy of financial statements and increased the responsibility of boards of directors in their oversight role. The standards of conduct that judge or evaluate one’s actions whether it is wrong or right, honest or dishonest, fair or not fair, are termed as ethics. Effective financial reporting is prepared on the basis of proper ethical behavior.

It will be beneficiary to apply the three below steps in the various respect o business as well as personal life.

  • 1. Identifying an ethical situation and the ethical issues involved with the business is an effective step for applying ethics. An accountant should employ personal ethics in order to identify ethical situations and issues. Some businesses and professional companies have their own written codes of ethics which are provided for guiding the accountants in some business situations.
  • 2. Recognizing and investigating the principal elements in those business situations is the next step for conducting the proper ethics. Then the accountant should identify the persons who may be harmed or benefit from the situation and make them aware of their responsibilities and obligations that are correlated with the business.
  • 3. Specifying the alternative way and considering the impact of each alternative with their consequences on various stakeholders is the last approach. Sometimes there may be one right answer or other situations may demand more than one right solution. These business situations require an evaluation of each and a selection of the best alternative.

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