The Ethics of Accounting Cycles
The accounting cycle is six steps that involves processing financial transactions over a given period of time for a business. These steps include analyzing transactions in real time, recording transactions, making note of debits and credits in the company's general ledger, moving financial figures and making adjustments on a trial balance sheet, preparing a financial statement and closing all temporary accounts. The responsibility in using an accounting cycle requires an ethical, diligent accountant.
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Frequency of Reporting
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Financial reporting through accounting cycles can reveal trends in revenue and expenses that may provide advanced notice to a company so it can adjust its operational strategies and avoid a cash shortfall. The frequency of this financial reporting varies by industry. Usually, a corporation in a volatile business market requires more frequent financial reports than a company in a more stable business environment. Ethics enters when a company is discussing how often it wishes to make these financial reports and whether the company is turning a blind eye to trends in revenues and expenses. This is especially true of a publicly traded company looking to hide financial information from shareholders in an attempt to "fix" the issue before making a financial loss public.
Making Account Adjustments
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Regardless of the diligence in recording expenses and revenues, accountants must make adjustments while moving financial figures to the company's general ledger. This usually involves identifying accounts receivable that the company cannot collect on and then writing these accounts off as bad debts. Deciding which accounts to write off is in part a judgment call. Accountants can very easily be too liberal in writing off accounts to obscure a corporation's financial figures or too strict by including accounts that company has no hope of collecting from business debtors.
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Including Fixed Assets
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Adjustment in accounting cycles is necessary for accounts including fixed business assets, including equipment and company inventory. Adjustments are necessary to account for depreciation of equipment and changes in inventory levels. The problem with this strategy is changes are only made at the beginning of each period and no month-to-month accounting of depreciation or inventory levels occurs, according to the Understanding Accounting website. Maintaining an ending inventory each month is the only way to ethically reconcile inventory levels to ensure the number of products sold matches sales figures. Without an ending inventory, a company won't find about losing product to theft or damage until months after the fact.
Steps in the Cycle
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The six steps in an accounting cycle provides an enormous arena to innocently switch numbers, lose financial figures and simply enter numbers in the wrong box. This can lead to financial reporting errors and false assumptions about trends in spending if these errors go undiscovered. An ethical dilemma arises in the purposeful switching of figures when moving finances from the general ledger to the trial balance sheet and then the company's financial statement. An accountant may be under enormous pressure to ensure positive figures emerge from the accounting cycle and this may cause the professional to make unethical and illegal alterations. A diligent account must ignore the pressures from corporate officers and present as clear a picture as possible of the corporation's financial health.
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