Question

Assuming you and your colleagues are attending the retreat, go to the Accounting Ethics Discussion, and complete the following tasks:

• Discuss why integrity, honesty, and transparency are essential in financial reporting. Give credit to any sources or real world examples you use to support your statements.
• GAAP are the general rules, regulations, and guidelines that accountants in the United States follow to ensure their practices are legal and ethical. Explain to your colleagues why GAAP is so useful. Give credit to any sources or real world examples you use to support your statements.

Answer 1

Ethics in accounting

Books of accounts are the devices used by the stakeholders of any institution to understand and gauge the overall well-being and financial health of the institute. The stakeholders include the shareholders, debt holders, employees, business partners, management, regulators and community in general. The management acts a fiduciary on behalf of the owners (equity holders) of the company and run the business. The stakeholders may or not be involved in the day to day business of the company but need to assured of the ability of the managers to run the business. The books of accounts provide a tool for these stakeholders to get an objective view in the financial health of the company. As there is an inherent conflict of interest between the owners, which are the capital providers, and management, which is the fiduciary for the institute, the books of accounts provide an impartial and rational method of judging the performance of the management as well as the business. Given such importance of financial reporting, it is essential that the reporting is unbiased, honest and transparent. Any unethical and/or illegal changed made to the financial reporting will create a false impression about the company in the minds of the stakeholders. This may give a temporary relief to any problem that the management may be facing but nor a solution. If, and when any discrepancy in financial reporting gets exposed, it decreases the confidence of the all the stakeholders in general on the company as well as the financial reporting system. The material and nonmaterial costs of these practices in long run are immense. A classic example of this is the Enron case. They reported the financials fraudulently, which created a very large shock to the community as a whole, not just the shareholders in the company.

US GAAP has come up with a set of rules for everyone to follow in financial reporting. This has provided a standard against all the financial reports can be compared. They provide a minimum required reporting standard. However, the company and the management can provide any additional information. In the financial world where every company has an incentive to highlight positive information and cover any negative information, the US GAAP creates a level playing field. It provides the rules all the companies need to adhere to so that no single player may tweak the financial reporting to mislead the investors. Confirmation by the management that they have followed the standard described by GAAP creates an assurance in the minds of the stakeholders about the company. GAAP provides legal and ethical standing to the financial reporting. Without it, we will not be able to compare any to companies on financial basis. It also promotes the growth of financial markets in the country. One way to look at it is to compare the markets which have a string financial reporting standards such as USA, with those where such strong standards do not exists such as less developed nations in Africa or Asia.