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Ethical Issues in Financial

Reporting

Ethical Issues in Financial Reporting

Ethics in accounting are concerned with how to make
good and moral choices in regard to the preparation,
presentation and disclosure of financial information.
Financial reporting is a straightforward task that comes
with a variety of tricky ethical issues.
Breaches in ethics can result in major scandals for
companies and lead to loss of investor and consumer
confidence.
Understanding some of the more common ethical issues
that can arise in financial reporting can help those in the
field avoid potential landmines that could bring not only
their employers, but also their careers, to their knees.

Ethical Issues in Financial

Reporting
Fraudulent Financial Reporting
Most accounting scandals over the last two decades
have centered on fraudulent financial reporting.
Fraudulent financial reporting is the misstatement of
the financial statements by company management.
Usually, this is carried out with the intent of misleading
investors and maintaining the company's share price.
While the effects of misleading financial reporting may
boost the company's stock price in the short-term,
there are almost always ill effects in the long run.
This short-term focus on company finances is
sometimes known as "myopic management."

Ethical Issues in Financial

Reporting
Misappropriation of Assets
On an individual employee level, the most common ethical
issue in accounting is the misappropriation of assets.
Misappropriation of assets is the use of company assets for
any other purpose than company interests.
Otherwise known as stealing or embezzlement,
misappropriation of assets can occur at nearly any level of
the company and to nearly any degree. For example, a
senior level executive may charge a family dinner to the
company as a business expense.
At the same time, a line-level production employee may
take home office supplies for personal use. In both cases,
misappropriation of assets has occurred.

Ethical Issues in Financial

Reporting
Disclosure
As a subtopic of fraudulent financial reporting, disclosure
violations are errors of ethical omission.
While intentionally recording transactions in a manner that is
not in accordance with generally accepted accounting
principles is considered fraudulent financial reporting, the
failure to disclose information to investors that could change
their decisions about investing in the company could be
considered fraudulent financial reporting, as well.
Company executives must walk a fine line; it is important for
management to protect the company's proprietary information.
However, if this information relates to a significant event, it
may not be ethical to keep this information from the investors.

Ethical Issues in Financial

Reporting
Penalties
This legislation allows for harsh penalties
for manipulating financial records,
destroying information, interfering with
an investigation and provides legal
protection for whistle-blowers.
In addition, chief executives can be held
criminally liable for the misreporting of
their company.

Ethical Issues in Financial

Reporting
Cooking the Books
Financial reporters may be asked to "cook the books" when poor
documentation has been kept of expenditures and asset value.
This practice involves making up figures that may or may not be
good estimates of actual numbers.
While pressure to do this may come from the very top of a
company, the practice is not only unethical, but also outright
fraudulent.
Cooking the books also includes manipulation of accounting
records in preparing financial statements, as well as the
intentional omission of important asset of liability information
from financial reports.
A company might overstate how much it made in profits to
attract investors, for instance, or understate its liabilities to avoid
creating investor panic.

Ethical Issues in Financial

Reporting
Cute Accounting
This term describes the practice of stretching or
bending standards set by the accountancy
profession to the limit.
An example of this might include structuring lease
agreements so that any leased assets, along with
any liabilities that come with those leases, can be
kept off their books.
Some financial experts argue that this is
unethical, because companies that do this are
essentially misrepresenting their assets and
liabilities.

Ethical Issues in Financial

Reporting
Conflicts of Interest
A conflict of interest can result when an employee
receives an inappropriate personal benefit as the result
of any actions performed in his official role as a
financial reporter.
As an example, consider a financial reporter who
overstates a company's income as a way to ensure a
larger bonus for himself.
This is a direct conflict of interest because the financial
reporter is reaping a gain from his unethical activities.
It also flies in the face of the accounting profession's
code of ethics, which requires absolute objectivity.

Ethical Issues in Financial

Reporting
Breach of Confidentiality
Insider trading is an easy example of breach of
confidentiality in financial reporting.
A breach of confidentiality refers to any
disclosure of confidential or proprietary
information that an employee acquires as the
result of her employment as a financial reporter.
When that information is used for personal gain
or for the gain of some third party, the financial
reporter has broken her implicit oath of
confidentiality to her employer.