Response to Marcela

Response to Marcela

Marcela,

I find that GAAP’s weak structure and the absence of ethical culture in the corporate world are to blame for manipulating finances to show more profits. Some practices allowed therein are manipulated by managers to portray a false picture regarding the firm’s financial performance. Firstly, entries pertaining to intangible assets, contingent assets, derivatives, and illiquid assets are based on opinion (Shroff, 2017). These entries are not accompanied by a coherent backup of analysis that validates their estimation; therefore, managers could use this weakness as a leeway in over or underestimating assets, leading to false reporting. Consequently, most investors prefer pro forma statements, given they are more precise. Secondly, managers use depreciation to exhibit different values for the same asset. Hence, the existence of GAAP allows businesses to manipulate financial statements with specific motives, e.g., securing loans or inflating the value of their shares.

Most companies lack the incentive to act ethically and are instead purely driven by the motive of financial gain. Thus, executives would sacrifice ethics for financial benefits. For instance, when issuing out shares in raising money for a capital project, they are more concerned with the finances to be raised rather than the value investors will get in return. As a result, they would rather mislead investors through inaccurate financial statements and earn more money from issuing shares (Hickman & Silva, 2018). At the same time, investors would not mind if the misleading financial reports were issued to creditors to secure a loan to bail out the company from the cash flow shortage. Hence, the absence of an ethical culture encourages false financial reporting among firms.

References

Hickman, C. R., & Silva, M. A. (2018). Creating excellence: Managing corporate culture, strategy, and change in the new age. Routledge.

Shroff, N. (2017). Corporate investment and changes in GAAP. Review of Accounting Studies, 22(1), 1-63.

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Response to Marcela

Please respond to the following post. Thank you

Marcela Munoz-Pepi 

RE: Ethical Issues Arising from Financial Rewards to the Executive

Hi Lisa,

I do agree that there should be something else that should be done about the conflict of interest, it almost seems

like big corporations and executives are given leeway to commit fraud and in turn we have companies like Enron manipulating and changing their financial statements and leaving a trail of people that lost money, jobs, pensions and were left wondering what they were supposed to do to get back up. Why do you think there isn’t more done to prevent the manipulation of financials to show more profit?

Great post, God bless