Ethical Issues Arising from Financial Rewards to the Executive

Ethical Issues Arising from Financial Rewards to the Executive

I disagree that executive management compensation should be tied to financial performance for two reasons. First is that the same workforce is involved in the preparation of the financial reports. Therefore, these managers could manipulate financial reports as a means of acquiring these bonuses (Needles, Powers,& Crosson, 2013). In past cases, managers have manipulated financial statements to depict a false view of the company’s financial performance. For instance, before its collapse, Lehman’s brother executive initiated Repo 105 and Repo 108 before the fiscal year reporting (Jeffers, 2011). This technique involves the sale of assets and repurchasing them after financial reporting. This transaction is aimed at reducing the company’s leverage, as exhibited in the balance sheet, as short-term loans are classified as sales. In doing so, the firm conceals its financial distress, and the value of its share and the EPS remains unaffected. Although this transaction is in line with the accounting law as outlined in SFAS 140, it is unethical simply because it misleads the firm’s stakeholders on the company’s financial performance. I hold the opinion that, given the managers have significant experience in the preparation of financial statements, they could create false reports by manipulating accounting rules and standards and remain unaccountable for their deeds. The ethical dilemma stems from the managers’ conflict of interest as they are prioritizing self-gain at the expense of shareholders’ wealth and the firm’s long-term viability.

“Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. (Luke 16:10, KJV). This verse explains the dishonesty seen and which manifests in the manager’s action of false reporting with the intent of seeking additional bonuses. If such employees were appointed in other firms exhibiting strong financial performance, they would act in a similar manner since dishonesty is part of their character.

References

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Nelson Education.

Version, K. J. (2017). Holy Bible. Arcturus Publishing Limited.

Jeffers, A. (2011). How Lehman Brothers used Repo 105 to manipulate their financial statements. Journal of Leadership, Accountability and Ethics.

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Many corporations reward their top executives with bonuses or provide additional compensation based on the financial success of the corporation. Measures like earnings per share, increases in the market value of the stock, or volume of sales become the gauges by which executives and managers are compensated.  Do you agree that executive and management compensation should be tied to financial performance? Considering that the executives and managers are often in the position of making decisions that affect these measures, what ethical dilemma and resulting disclosure do they face? Review the Scripture provided in Biblical Perspectives throughout the course (or from your own research), and describe any guidance from the Bible that could guide Companies and Executives as they ponder measures and compensation.