Ethics and Financial Reporting

Ethical financial reporting requires that a company’s financial report show an accurate and fair view of a firm’s financial position and statements of affairs (Melé, 2017). Usually, a company’s management is responsible for preparing the financial reports and, therefore, for any misstatement or unfair information provided. Financial statement users have a right to reliable information recorded in the income statements (Frias‐Aceituno, 2014). Therefore, Generally Accepted Accounting Principles (GAAP) specify recognition, valuation, and classification as significant factors in ethical financial reporting; these factors enable the management to produce reliable information for the company’s shareholders and creditors.

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The management of Beacon System has not acted ethically since they intend to violate the recognition guideline. The company recognizes revenue based on the percentage of completion. The company’s management has requested a new report showing 90% completion, yet the $7 million project is only 75% complete; the change will enable the senior managers to achieve their financial goals for the year, thus receiving a bonus at the year-end. If the changes are made, the revenue generated from the project for the period will be overstated, and so the net earnings. It means that the financial report for the year-end will not be reliable for the shareholders and other users of the report.

If asked to prepare a new report showing 90% completion, I would not prepare the report because the change doesn’t reflect the proper revenue generated. The new report is based on self-interest since senior managers only try to secure a substantial year-end bonus. Upon receiving the request, I will write to the management explaining that the report intends to deceive shareholders and other users of the report (Hope, 2013). If the management disagrees, I will contact the firm’s directors concerning the reporting issue and the disagreement with the management.

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References

Frias‐Aceituno, J. V.‐A.‐S. (2014). Explanatory Factors Of Integrated Sustainability And Financial Reporting. Business Strategy And The Environment, 23(1), 56-72.

Hope, O. K. (2013). Financial Reporting Quality Of US Private And Public Firms. The Accounting Review, 88(5), 1715-1742.

Melé, D. R. (2017). Ethics In Finance And Accounting: Editorial Introduction. Journal Of Business Ethics, 140(4), 609-613.

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Question

Session 2: Discussion