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.
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.
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. In “Ethical Issues in Financial Reporting: Is Intentional Structuring of Lease Contracts to Avoid Capitalization Unethical?” author Thomas J. Frecka states that this was one factor that led to the Enron scandal. While less egregious than cooking the books, this practice demonstrates a lack of respect for the principles the accounting profession abides by.
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.
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.