Ethics are moral standards that guide behavior and activities. Ethical dilemmas arise when one faces difficulty in choosing between two possibilities that are both ethically questionable. Such dilemmas can be complex and challenging to resolve, occurring in various social, professional, and personal situations. Therefore, it is essential for individuals to have the ability to make ethical decisions in such circumstances.
Financial reports provide insights into a company’s financial health. These reports, prepared by accountants and financial staff, adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Auditors may analyze financial reports before presenting them to owners and investors, ensuring accuracy and compliance with industry standards. Financial reporting is crucial for both private and public companies, as it informs owners and investors about an organization’s capabilities, weaknesses, and potential issues. Stakeholders use these reports to assess investment potential and identify financial concerns. Financial accounting mandates the use of accounting standards to maintain consistency across industries.
Despite the existence of rules and procedures in financial reporting, instances of misstatements still occur. The most common ethical dilemmas in financial reporting include “cooking numbers” (cosmetic accounting, creative accounting, or income smoothing), disclosure violations, misappropriation of assets, fraudulent financial reporting, tax evasion, concealment of financial information, misrepresenting expertise, overcharging fees or over servicing clients, and bribery.
The major financial scandal due to ethical issues was the Enron Corp.’s story, which illustrates a company that experienced a remarkable rise before facing a devastating downfall. The collapse of this ill-fated company had far-reaching consequences for thousands of employees and shook Wall Street. At its peak, Enron’s shares were valued at $90.75, but by December 2, 2001, they had plummeted to $0.26. Subsequent corporate bankruptcies, such as those of Lehman Brothers, WorldCom, and General Motors, have surpassed Enron’s fall, making it the largest corporate bankruptcy in the history of the financial industry. Shareholders lost $74 billion in the four years leading up to Enron’s bankruptcy, and employees suffered significant losses in pension benefits. The Enron scandal shed light on accounting and corporate fraud.
In light of this, we must explore the causes of this financial menace. The primary causes of ethical issues in financial reporting include pressure from clients, conflicts of interest arising from organizational management or leadership, and a lack of integrity.
In conclusion, one common aspect of guidance for resolving ethical dilemmas in financial reporting is to help accountants understand and apply the fundamental principles outlined in their professional code of ethics. According to a survey conducted by the International Federation of Accountants (IFAC) on the topic of “Managing Responsible Business: A Global Survey on Business Ethics,” “A distinguishing characteristic of the accountancy profession is the responsibility to act in the public interest, and professional ethics expect accountants to regulate their behavior in accordance with the Code of Ethics for Professional Accountants (Code) developed by the International Ethics Standards Board for Accountants (IESBA). IFAC member organizations are required to comply with ethical standards that are at least as stringent
In general, financial reporting decisions should align with a business’s objectives and the interests of owners and shareholders. The goal of financial reporting is to provide relevant and reliable financial statements that are meaningful to stakeholders as capital providers. Managers must utilize financial reports to inform external investors about their organization’s performance and governance. Financial reports should never be intentionally misleading; instead, they should provide relevant, reliable, and appropriate information to support users in making informed decisions. Providing high-quality financial reporting is crucial as it influences stakeholders in making investment decisions, extending credit, and allocating resources, ultimately impacting overall market productivity. Therefore, efforts should be made to encourage the adoption of better financial reporting systems to ensure the relevance and reliability of financial statements.