In recent history, there have been quite a few memorable cases of corporations manipulating financial reports in order to deceive stakeholders. Deceptive accounting practices are like a disease, and should be rooted out immediately. These practices undermine the stability of U.S. financial markets, and can make people less willing to invest in stocks. Financial reporting is the key to maintaining trust in the financial system and any manipulation should not be tolerated.
The purpose of financial statements
Financial statements are the primary instruments used in assessing the performance of a business and its managers (Gibson , 2013). In order to make well informed decisions, interested parties must be able to assume that a company’s financial statements are an accurate representation of its performance. Financial statements are used by customers, employees, governments, investors, lenders, and suppliers to influence numerous types of transactions. Investors can use financial statements to determine a company’s value as an investment. Governments can use financial statements to determine a company’s tax liability. Lenders and suppliers can use financial statements for determine a company’s creditworthiness. Good decisions rely on accurate financial reporting.
Situational Ethics
An article titled; The Dangerous Morality of Managing Earnings, by the National Association of Accountants (1990) as cited by Gibson (2013), highlights a broad range of questionable financial reporting practices that many managers at many levels suggested were acceptable in the name of meeting their objectives. According to the article, many managers stated that taking unproductive actions to boost short-term earnings was acceptable because the accounting...
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...ncial statements reflect its true state. Greed can drive individuals to take risks with other people’s money, and as such, only those with the highest moral fortitude should have governance over the finances of a publicly traded company. When companies with countless investors fail, many people lose a large portion of their life savings and their faith in financial markets.
Works Cited
Gibson, C. H. (2013). Financial reporting & analysis: using financial accounting information (13th ed.). Mason, OH: South-Western/Cengage Learning: Management Accounting, August 1990.
Gowthorpe, C., & Amat, O. (2005). Creative Accounting: Some Ethical Issues of Macro- and Micro-Manipulation. Journal Of Business Ethics, 57(1), 55-64. doi:10.1007/s10551-004-3822-5
Wilson, A. C., & Key, K. G. (2012). Enron: A Case of Deception and Unethical Behavior. Feature Edition, 2012(1), 88-97.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
Wolk, H., Dodd, J., & Tearney, M. (2003). Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th edition ed.). South-Western College Pub.
Over the years fraudulent financial reporting has increased the concern of the reliability of the US financial reporting practice. It also call into question the roles of auditors, regulators, and analysts in financial reporting. It is well known that frauds affect the fraudsters, auditors, and investors; however it can also affect citizens, industries, and financial markets, while also manipulating both accounting and auditing standards.
An important part of financial planning for corporations is the annual report. Publically held companies are required to submit an annual report to the SEC and private companies, even though not required, can use an annual report to gauge the performance of the company for the past year and use the report to plan for the future. The financial statements that make up an annual report are the income statement, the balance sheet, and the statement of cash flows. (Melicher, 2014) Once all of the financial information has been compiled and the three statements that make up the annual report have been completed a corporation can then start to analyze the data. There are several different categories of financial ratios
... tempted to falsely inflate earnings is to take away their personal gains, if the company's stocks go up. I believe that when upper level management has too much incentive based on personal financial gain, which is directly based on the performance of the company; it compromises their judgments. I think that upper level management should not be allowed to receive stock options or to even own stock in the company as the financial statements would provide a neutral, bias-free report. Management would have no reason to "cook the books." I also feel that any management who still decides to falsify documents needs to be held more accountable for their actions and receive tougher punishments. I think that these strict guidelines would help the people in the United States and people all over the world feel more confident in investing their money into the stock market.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
...ulating corporate reporting. a critical review of arguments. ‘Accounting and Business Research’, Vol. 40. , pp. 275-77.
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
The field of financial reporting tends to bore many people, until it makes the front page in a typically catastrophic fashion due to one scandal or another. While we are happy ignoring the important accounting function of reporting and auditing while that function works properly, as soon as it fails, we turn on corporations and the accountants that keep them running to call for justice and perhaps reform. Today, the accounting practices of publically-traded companies are governed by numerous regulations and requirements, among them the Sarbanes-Oxley Act of 2002 (SOX), a piece of legislation introduced following a number of headline accounting scandals at companies like Enron and WorldCom (HBS Working Knowledge, 2014). It is vital that users
With over twenty years of work experience I have witnessed managers at all levels utilize various tricks to manipulate short-term quarterly earnings. It seems like most managers have different views on what is ethical and unethical when it comes to managing short-term earnings and tend to use questionable practices to meet company numbers. This has been confirmed from The Dangerous Morality of Managing Earnings case study as according to Gibson the accounting practice of offering a fourth quarter sales incentive and allowing customers 120 days to pay in an attempt to increase fourth quarter sales numbers was posed to the managers in the case study and returned results indicating that the practice was viewed as ethical, questionable, and even unethical (1990/2013). Without a unanimous response for this practice it is confirmed that each manager views this practice differently and with so many ways for financial numbers to be manipulated it would be difficult at times to get an accurate picture of a company’s current financial well being.
Financial statements can provide a wealth of information about a given organization. These statements provide information about the company’s financial position, cash flows, operations, performance and changes in the financial position. This information may be used as part of the decision making process for employees, shareholders, investors and competitors. Based upon these financial statements, key ratios are used to provide additional insight as to the financial health of a given company. Being familiar with financial statements can increase financial literacy. For this discussion, Citigroup’s (Citi) financial statements will be reviewed.
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
According to the Encyclopedia of Business in Today’s World, earnings management can be defined simply as “an accounting process whereby managers manipulate reported earnings to obtain some private gain.” Most companies today take part in earnings management in order to maximize profits and stock value and reduce fluctuations. In the United States companies must comply with US Generally Accepted Accounting Principles; however, there is room for interpretation and judgment, which leads to earnings management. Although earnings management does not break the law, many view it as opportunistic and believe it can have a negative effect on earnings quality and may weaken the credibility of financial reports. However, some believe that earnings management is beneficial; “recent studies have argued that earnings management may be beneficial because it potentially enhances the information value of earnings”. This paper will provide a review of the different motives of earnings management, also referred to as creative accounting in European countries. There are four evident motives for earnings management which will be discussed; compensation, income smoothing, capital market pressures, and financial requirements.
...l, 1993). It was Scott’s idea that unity in accounting can be achieved if external financial statements users are also considered in the equation and the whole idea could gain popularity, little did Scott know that FASB by 1978 would identify the first objective of financial reporting as “Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decisions" (FASB, 1978). The second level of Scott’s framework was the pervasive principle of justice, which prescribed unbiased accounting rules that are fair to all users of the financial statements. Scott identified justice as the foremost duty in the financial statements to address the concerns of the public regarding false and misleading financial disclosures (Lawrence et al, 1993). The third level of Scott’s framework was the principle of truth and