The Importance of Ethics and Judgement - Essay Example

THE ROLE OF ETHICS AND JUDGMENT IN ACCOUNTING AND FINANCIAL REPORTING Executive summary Over the recent past, the role of ethic has been witnessed in the general business landscape and operation. This is due to the various ethical and judgmental traits that have characterized the people who the operate in the businesses. In this study, we seek at highlighting the role and the importance of ethics and judgment in the general accounting and financial reporting cycle. The study begins with the giving of an introduction on the basics of ethics and what they entail. Judgment is also analyzed in the case study. The two doctrines are explained deeply and their different components are analyzed. Some of the attributes that are considered as being ethical to put to use are analyzed. On the other hand, those activities and undertakings that are considered as being unethical are also listed. In the study also, some of the potential misgivings and losses that would accrue to the businesses as a result of the lack of ethics and judgment, the understanding of the study entails at developing a culture and nature that puts into use ethical attributes. Some case studies that entail the use of ethical aspects have also been categorically listed. They are directed at developing knowledge and understanding in the field of accounting and financial reporting. The case studies are in line with the development of the understanding on the field of accounting and financial reporting and the effects of the lack of ethical use in the businesses. By the end of the study, the learner will be able to have not only an idea of but also deep knowledge of the field of ethics and judgment and the importance of this in the field of accounting and financial reporting. There is also an analysis on the areas of judgment that exist in a business. These areas require the management to use certain given assumptions in the undertaking of the accounting of an entity to arrive at a certain amount or figure. It includes the making of decisions on the assumptions to put into business in the undertaking of the accounting procedures. The assumptions made affect the amounts reported of assets, liabilities, revenues and expenditures. They act as guidance as to the policies that the company will use in its process of goal attainment and meeting of the set objectives. Introduction Ethics is a discipline or a field that deals with activities that are considered as being good or bad and which have moral duty and obligation to the people. In general, ethics means doing what is considered as being right. The doctrine of ethics is very crucial in the field of business. Ethics are the drivers as to the continued existence of the businesses. (ROTH, 2005) This is through the creation of a form of direction as to the manner in which the people conduct their affairs. This is also in accordance with the manner in which they carry themselves. Judgment is the manner in which the people make decisions as to whether a certain action is right or wrong to undertake. Judgment and perception are the directors of the undertakings. They go hand in hand with ethics. This is because people who have high levels of integrity are able to make better and right judgment. (ROTH, 2005) Areas of judgment The undertaking of ethics and judgment mandates is based on some areas of some areas of judgment in the reporting of financial statements. Some of the typical areas of judgment include in provisions, depreciation on assets, analysis of assets both tangible and intangible and the extraordinary items. It also includes the recognition of revenues and expenses and the analysis of the liabilities of a business. The areas of judgment require that the management makes some assumptions that will impact on the amounts and the outcomes that are made from the accounting activities of the business. Some examples of assumptions that are put into use include in the treatment of the fair value of the intangible assets of the company. in this, the assumptions include the potential future revenues that are expected to be made by the business. Another one is the determination of the best discount rates that will be used by the company in the undertaking of this. The determination of the useful life of an asset is also an assumption that should be made by the management of a given organization. The areas of judgment hence require the management to make some business decisions and judgments that will affect the results that will be obtained from the undertakings of the business in its operations. The decisions that should be made by the management will be on all the areas of judgment that have been listed and that will affect the results that the company will make from all its operations and trading. In the undertaking of the judgment and in the decision making process of the management, they should stick to and adhere with ethical values that are acceptable of them. Failure to do this, their operations will be on a platform that is not ethical and the future and the running of the business will be at risk of failure because of this. They should hence be ethically upright. Components of ethics that facilitate accounting and financial reporting The doctrine is developed under some main pillars. It is through them that it is best defined. (BOYLAN, 2014) They are as listed below; a. Trust – This environment is created by ethics. It is where people believe that they will be accorded all they fairness that they deserve. It also comprises of transparency in all the aspects of accounting and financial reporting. This environment is termed as lie free. Ethics make the ill of lies to be completely eliminated from the workplace and also in the reporting of the financial and account ting information of a business or a firm. With this, the users of the financial information will not be in any way mislead by the information that is presented. (BOYLAN, 2014) b. Confidentiality – accounting matters have a trait that they possess. They should be operated in a very confidential environment. Ethics make a person not to disclose private matters and affairs to people who are not supposed to have access to it. Such people include family members, friends, competitors and other third parties who are not allowed to have the access to such vital information. It is though the virtue of ethics that such high levels of confidentiality are maintained in the business place.( BOYLAN, 2014) c. Collaboration – ethics fosters the development of an environment that is comprised of sharing of ideas between people. Through this, honesty is upheld between the people who operate in the environment that is thereby created. In this, each set of people brings forward ideas and thought that they perceive to be very crucial for the operations of the business. d. Integrity – integrity is the mother of all the virtues that fall under ethics. This virtue means that the people should adhere completely to a certain predetermined set of behavior or conduct. This is the adherence to a given ethical code acceptable to all. It is through integrity that all the other aspects are developed. (BOYLAN, 2014) The doctrine of ethics can be best understood through the use of a case that builds the ideas as to what ethics entails. A good case study that can be used in the description of the concept of ethics is the scandal that is fondly referred to as the Enron Scandal. Case study 1; the Enron Case Enron was a product of the merger between two companies that had some continued existence. They were Houston Natural Gas, which was a well-known gas company. The other company to the merger was InterNorth. This was on the other hand a well renowned gas pipeline company. The formation of the merger was at the beginning a very tough undertaking. The business was very unstable in its operations. This was until the appointment of a business consultant named Jeffrey Skilling by the CEO of the company at the time. He was a self-motivated man full of business and expansion ideas. Following the implementation of the ideas, the business rose from its shaky ground to become a world-leading player in the gas industry. The company made many contacts worth large amounts of money and even with time developed into the web based merchandise trading. The returns that were made from the undertakings were handsomely great for the company. The future of the company and its continued existence came to a defining moment in the year 2000. During a meeting, which comprised of stock market analysts and potential business investors, Jeffrey made some comments that would have been wrongly timed. He stated that the broadband network side of the business has a value that exceeded 29 billion dollars at the time. The financial statements that were also provided were in line with the comments of Jeffrey. They all stated that the value of the company was well over the amount just as Jeffrey had stated. This was to the delight of the people and in some months after the meeting, the stock purchased by the investors has increased by more than 50%. The unethical part of this was that all this was a lie. The management of Enron at the time hid the debts and the losses of the company. This was by shifting the dollar amounts to other offshore accounts. They made it appear as if the company was making profits by falsely stating the revenues of the company. This case illustrates an unethical undertaking by the management of the company. Case study 2 – the Satyam Scandal The second case that hit the world on the issue of ethics is the Satyam scandal. Just like the earlier stated case, the chairman and promoter of the company who was known as Raju undertook activities that were unethical in nature. He colluded with other people including the CFO of the company and the auditors in a bid not to relinquish their share of the company’s equity. They undertook activities such as overstatement of the revenues and profits of the company. They also overstated the amounts of the debtors and on the other hand understated the business liabilities. He also created an extra 13,000 ghost workers who were salaries but nonexistent. With this, he overstated the staff number from 40,000 to 53,000. He also put in place-accrued interest for the business, which was in all ways not existent. (KUMAR, 2009) The effect of this was the putting of Raju and his fellow accomplices behind bars. The stock prices of the company also fell to very low levels. This resulted to the company being suspended in both the Bombay Stock Exchange and the New York Stock exchange. They were later fined very hugely for the frauds that they committed. This is a good illustration of the effects of unethical undertakings. (KUMAR, 2009) Case 3 – Storm Financial The third case that can assist in the creation of understanding of the case of ethics is the case of Storm Financial. It was recorded as one of the largest investment failures in the history of Australia. This was because with its collapse, more than 3 billion dollars were recorded as losses by the investors. According top analysts, the collapse was due to wrong financial advice that was given by the financial advisers of the company. with its collapse, the investments of close to 4000 investors went to the drain. Advice had been given onto the application of what they called a double gearing process. It entails borrowing against the house of the client. This was then followed by then using margin lending to invest into the share market. Following this, the advisers failed to warn the investors of the effect and the risk of the collapse of the share market as it happened then. This resulted to the making of huge losses after the fall of the share market. Had they acted ethically as required of them, then such losses would not have been made. (NOCERA, 2010) According to the enquiry into the collapse, it is alleged that it was as a result of unconscionable and unethical conduct of the accountants and financial officers of the company. Effects of poor ethics The presence of poor ethical standards in accounting has several effects to a business in the conducting of its operations. The effects can result to the general decrease in the performance of the business and in the levels of returns that are made. (VAN CAMP, 2014)This can also affect the manner in which the financial statements are reported to the users. Some of the effects of poor ethics to a business include; a. operation of criminal activities Once accountants lack strong ethical stands, they are more prone to undertaking activities that are illegal. The activities that they undertake can be for the intention of benefiting themselves as individuals or the businesses that they operate under illegally. Ethics as such eliminates a vice such as this. b. business reputation Once a business is perceived to be operating on standards that are considered as being unethical, and then it is more bound to lose not only its customers but also actual and potential investors. This is because it results to the erosion of trust that previously exist in a business and which it had been previously accorded by the people. It as such makes less and diminished returns from its operations. It is even more prone to making losses from its operations as compared to the period before. (VAN CAMP, 2014) c. personal consequences to the accountants Accountants should ensure high levels of integrity. As such, they are expected to abide to a certain given code of conduct in their operations and undertakings. Once they are caught to have operated in a manner that is not in line with their professional standards, then they are punished. d. validity of the financial statements Once a business and or its accountants are found to have operated in a manner that is deemed not to be ethical, then the people and other users of the financial statements lose trust in them. As such, a business loses its grip of the market and in the investor industry. The legitimacy of the reports that are released is questioned and the trust of the users to them is eroded completely. In the end, the business is more prone to dwindle and eventually collapse. These factors clearly denote the benefit of ensuring of ethics to a business both by the management and by the accountants in the financial reports that are released to the public. (VAN CAMP, 2014) Conclusion In conclusion, the benefits of putting in place and undertaking operations in an ethical manner stand out for themselves. The benefits as illustrated are many for both the accountants, the company and the users of financial records. The effects of failure to work ethically have also been pointed out. Accountants and business people are thereby advised to ensure the highest degree of ethics in their operations to reap the most benefits of doing so. During the making of business decisions and assumptions in the key areas of judgment, the management should stick with ethically recognized standards that are upright and acceptable. References BOYLAN, M.2014. Business ethics. Chichester, West Sussex, John Wiley & Sons, Inc. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=605995. FOX, L.2003. Enron: the rise and fall. Hoboken, N.J., Wiley. KUMAR, A. 2009. Asatyam @ Satyam. New Delhi, Diamond Pocket Books. MCLEAN, B., & NOCERA, J.2010. All the devils are here: the hidden history of the financial crisis .New York, Portfolio/Penguin ROTH, J. K.2005. Ethics. Pasadena, Calif, Salem Press. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=140687. RYDER, N.2014. The financial crisis and white collar crime: the perfect storm? VAN CAMP, J. (2014). Ethics. Belmont, Calif, Wadsworth. Read More