Ethics in Preparation of Financial Reports
Ethics in Preparation of Financial Reports
Introduction
The preparation of financial reports requires that the management and the financial team adhere to high standards of ethics and professionalism so as to avert fraudulent reporting. When discussing ethics and financial reporting, companies such as Enron come to Mind. Enron collapsed after a period of fraudulently leading the public to believe that they were flourishing and making profits. After its collapse, it became clear that the management of the companied ignored all possible ethical standards that involve effective business practices and financial reporting (Wagner, & Henderson, 2003). There are several issues that the finance team faces during the preparation process. One of them is transparency.
Transparency
The ethical issue of transparency arises during the preparation of financial reports. When preparing financial reports, accountants are faced with the task of preparing financial reports that show positive results and growth of the organization. The financial team has the choice of being honest by giving the true picture of the company’s performance or they can choose not to make full disclosures on the financial position of the company. It is a requirement by regulatory bodies such as SEC to make full financial disclosures to their public. This is done after an agreed financial period. Transparency as an ethical issue also means that those responsible for the preparation of the financial report must use basic business language for the lay-man to comprehend the content (Turner, 2001).
Some company’s may use complex legal and business terms in their financial reports so as to deter readers from reading through the entire report. Overall, transparency refers to effectors not to hide or blur any financial information that is relevant to the shareholders, investors and the public as a whole. Transparency in financial reporting enhances market discipline and stability. With transparency, market players are able to evaluate present risks, adjust funds in an effort to promote efficient financial markets. Transparency means providing investors, shareholders and the public with adequate information so to enhance clarity and understanding. Practices such as funneling of investments through holding companies and engaging in off-sheet balancing leads to lack of transparency as the public is misinformed on the actual organizational financial position.
Integrity
The second ethical issue is integrity during the preparation of financial reports. Integrity is the ethical aspect of being honest, truthful and accurate in one’s actions. When preparing financial reports, it is the responsibility of managers and the financial team to ensure that the information theory provide in the financial report is factual. The financial reports should be the actual picture of the organizations financial status. In upholding integrity managers should strive to remain objective with their personal opinion, prejudice and bias not reflected in the financial reports (Lander, & Auger, 2008). When the financial team engages in the manipulation of stocks, for instance, the financial report will have lost its integrity as it would be a false depiction of the financial position of the organization. Article III, on the principles guiding the American Institute of Public Accountants reviews the ethical issues of integrity. Integrity is one of the vital principles of professional conduct in the accounting profession. Integrity is the quality from where the public derives trust and use the quality as a benchmark to make all decisions. Integrity in financial reporting is vital as it means giving accurate and objective findings regarding the financial status of the organization. With integrity, the financial team and management will not dupe the investors, and the general public.
Integrity in the preparation of financial reports requires that the financial team presents a report that is true and fair. Unethical financial reporting overrides the essence of integrity as the information provides is not true and has been manipulated. Unethical behavior such as covering one’s selfish interests over the public rewards for unethical behaviors and abuse of position to approve manipulation of financial reports is among the unethical behaviors that result to a financial report that is neither true nor fair. Integrity in financial reporting is an indicator of good governance within an organization (Ingram, & Albright, 2006). It is an indicator that the management upholds honesty and truthfulness in their operations. In the end, an organization that is recognizes for its honest financial reporting will attract numerous investors hence increased growth and performance.
In conclusion, upholding ethical standards during the preparation of financial reports and statement is vital for any organization. Acts such as the Sarbanes-Oxley Act of 2002 were passed with the intention of establishing new standards with regards to accounting practices and financial reporting practices. The act requires that management approve all the financial information prior to release to the approval. Approval means that the management will certify that the content presented in the financial reports represents the true picture of the financial position of the organization (McEwen, 2009). Financial reporting that was not honest and transparency would result to harsh penalties for the organizations. The act also increased the authority of external auditors with regards to their ability to review financial reports and verity where they are authentic, or they have been manipulated.
Reference
Ingram, R. & Albright, T. (2006). Financial accounting. Cengage learning
Lander, G. & Auger, K. (2008). The need for transparency in financial reporting. Journal of accounting & organizational change. Vol. 491): 27-46
McEwen, R. (2009). Transparency in financial reporting. Harriman House limited
Turner, L. (2001). Transparent financial reporting and disclosures. US Securities & exchange commission.
Wagner, D. & Henderson, N. (2003). Ethics in Financial re porting. Orlando Annual Meeting. Vol. 29(3)
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