Introduction Corporations usually communicate with shareholders through making disclosures within and outside the financial reports. The narrative disclosures in financial reports have become longer and more sophisticated in the recent years. With the increasing number of corporate scandals, it has been questioned that whether the financial reporting quality has been undermined by such disclosures. As the statement argued, ‘Disclosure outside the financial statements is only used to manage the impressions of gullible shareholders.’ which generally means that such disclosures mislead the shareholders through manipulating their perceptions. Disclosures outside the financial statements include the narrative disclosures within the financial report such as Chairman statement, CEO statements, future improvement plan, etc. (just excludes P&L accounts, balance sheets, cash flow statement together with associated notes) and those disclosures outside the financial reports which can be found on corporate websites, press release. Such as profit warning, RD activities, takeover intentions, capital expenditures, etc. In a broad way,impression management refer to the process that someone influences the perceptions of the others. In a corporate reporting context, it means “strategically display and present the information in a manner that is intended to distort readers’ perceptions of corporate achievements” (M-DB, p.415, taken from Godfrey et al, 2003). In the statement, it constrains this kind of readers to be the shareholders, more exactly, gullible shareholders. They are unsophisticated, may not have professional knowledge of the stock market thus unable to tell the truth or just simply believe what they heard. In my opinion, this s... ... middle of paper ... ... information or impression management? Journal of accounting literature, 26, 116–194. Merkl-Davies, D.M., Brennan, N.M., and McLeay, S.J., 2011. Impression management and retrospective sense-making in corporate narratives: a social psychology perspective. Accounting, auditing and accountability journal, 24 (3), 315–344. Merkl-Davies, D.M., and Brennan, N.M., 2011. ‘A conceptual framework of impression management: new insights from psychology, sociology and critical perspectives’, Accounting and Business Research, 41, pp.415-437 (M-DB) Rutherford, B.A., 2003. Obfuscation, textual complexity and the role of regulated narrative accounting disclosure in corporate governance. Journal of management and governance, 7 (2), 187–210. Yuthas, K., R. Rogers and J. F. Dillard. 2002. Communicative action and corporate annual reports. Journal of Business Ethics 41 (1-2): 141-157.
Due to the use of the company’s annual report for users to make decisions, ensuring that the financial reports convince the objective of general purpose financial reporting and qualitative characteristics of useful financial information as outlined in the IASB September 2010 ‘Conceptual Framework for Financial Reporting’ (CF) have become extremely important. Such failure of disclosures can mislead information on the company’s financial statements.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
According to Marshall (2004), "accounting is the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgements" (p. 3). Specifically, financial accounting "refers to the process that results in the preparation and reporting of financial statements for an entity" (Marshall, McManus, & Viele, p. 5). While many entities prepare their own financial statements, firms can also contract with a public accounting firm or a Certified Public Accountant (CPA) to perform services such as reviewing or compiling statements. (A CPA is a professional designation granted by individual states.) Entities that are publicly traded or complex in nature contract for auditing services. The provider of the auditing service will test the compliance of the entity's financial reporting against generally accepted accounting principles as issued by the Federal Accounting Standards Board (FASB). The provider will also ensure that the company, if publicly traded, complies with requirements of the Securities and Exchange Commission (SEC) and the regulations of the Public Company Accounting Oversight Board (PCOAB). This paper briefly explains the principles of financial accounting and how the deviation from ethical and legal obligations led to greater government oversight and the need for ethics training of future accounting professionals.
Financial reporting delays have long been a problem for companies (Abbas, 2009). In some instances reporting delays reach crisis levels, so that owners and shareholders, as well as senior management, do not have accurate and timely financial information on company performance (Pasquali, 2012). It is also not uncommon, as in Sahira’s case, that the data needed for financial reporting has not kept up with technology, requiring manual input or manipulation of the data, or “re-keying” of data into the company’s accounting software to produce financial reports (Financial Executive, 2012), and thus delaying the timeliness of financial reporting (Pasquali, 2012), and often resulting in errors in reporting (Karabi...
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
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
Financial statements provide useful information to a wide range of users. These users include shareholders, owners, investors, suppliers, managers, government and creditors etc. Many users rely on the information from financial statements to make decisions. Therefore, financial statements should be relevant, provide faithful representation, comparability, verifiability, timeliness and understandability. However, there are different evidences of managers manipulating the earnings for various reasons. “Earnings management is the choice by a manager of accounting policies, or real actions, affecting earnings so as to achieve some specific reported earnings objective” (Scott, 2012, p. 423). Managers play an important role in the company because they have control over the accounting policies, thus, the managers can manipulate the income. There are different viewpoints about earnings management. Some people think it will protect the company’s interests to allow the managers to manage the earnings, and others oppose it.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Although, the Sarbanes-Oxley Act has enhanced corporate governance and lowered the incidence of fraud, recent studies reference that investors and management still have concerns about financial statement fraud. For example:
CEO Kenneth Lay’s ambition for ENRON a company he had helped form went beyond the business of piping gas. Enron went to become the largest natural gas merchant in North America and the United Kingdom. But the reality is, this company business model never worked. This was a company that was so desperate to win Wall Street 's respect that it kept it stocks shares prices going up despite the losses it was incurring in order for executives to keep lining their own pockets. Over the course of this Case Assignment, I will identify the examples of financial reporting misconduct, I will explain the deontological as well as a utilitarian ethical perspective and lastly I will identify the stakeholders likely to be affected by that misconduct.
Taylor, S. E., Peplau, L., & Sears, D. O. (2000). “Person Perception: Forming Impressions of Others.” In N. Roberts, B. Webber, & J. Cohen (Eds.), Social Psychology (pp. 62-97). Upper Saddle River, NJ: Prentice Hall.
Financial statement fraud is very detrimental to the company because it can lead to several consequences including: a) the need for investigation; b) remediation efforts; c) negative market reactions; and d) examination by researchers (Trompeter, Carpenter, Desai, Jones, K. L., & Riley Jr, 2012). Moreover, Tugas, (2012) argue that financial accounting fraud have place the accounting profession in bad light. Even, Beasley, Carcello, and Hermanson (1999) explain “that consequences of financial statement fraud to the company often include bankruptcy, significant changes in ownership, and delisting by national exchanges.”
Financial communications involves financial reporting, McCarty’s engages in financial reporting which involves communication, several individuals and firms alike hold an interest in how McCarty’s performs as a company, these individuals or firms can be called stakeholders. Stakeholders can learn about a company’s performance, in this case, McCarty’s, by reviewing the yearly published financial statements. Stakeholders can use the income statement to find out the company’s profitability, the balance sheet communicates the company’s ability to obtain and invest its resources. The statement of cash flows communicates McCarty’s ability to manage its cash, whereas; financial results are communicated through published financi...
Risk is driven by internal and external factors and is viewed by ASB and ICAEW as an uncertainty on the amounts of benefits that includes both gains and exposures to loss. According to Beretta and Bozzalon (2004), risk disclosures are the consequences to the explanation that communication of factors has a potential to affect expected results (Abraham and Marson 2012) So in order to understand what disclosure information is required for risk reporting, it is important to understand what kind of risk is affecting the organisation. The main goal of having financial instruments is to make profits and prevent losses; there is always uncertainty on whether this goal is achieved (Sutton, 2004). This uncertainty can be divided to three main categories: credit risk, liquidity risk and market risk that looks into currency risks, interest rate risks and other price risks. The main reason for risk reporting is due to agency theory, information asymmetry...
The burden for public companies to succeed at high levels may place undue stress and pressure on accountants creating balance sheets and financial statements. The ethical issue for these accountants becomes maintaining true reporting of company assets, liabilities and profits without giving in to the pressure placed on them by management or corporate officers. Unethical accountants could easily alter company financial records and maneuver numbers to paint false pictures of company successes. This may lead to short-term prosperity, but altered financial records will ultimately spell the downfall of companies when the Securities and Exchange Commission discovers the