Question

Describe two unethical financial reporting methods that could impact customers or shareholders?

Answer 1

•   The shareholder wealth is positively affected by the good ethical behaviour of the firms. Shareholder wealth in this context refers to the stock price as a capital gain or loss over a certain period of time. Keeping this in mind, several firms have implicit and explicit code of conduct. The firms with good ethical behaviour affect the stock performance positively or the firms with weak ethical behaviour affect stock performance negatively. Whether stockholders will benefit from investing in companies with good ethical background or will they be punished due to the unethical behaviour of the management. Business ethics reduce several costs which affects the profitability of the business. There are however mixed views on the relation between company performance and business ethics . under the evaluation that profitability is highly affected by the business ethics, and share prices due reflect the company’s performance. The profits allow corporations to reinvest them for the future growth which is strictly monitored by the market and the shareholders.

•   Management thinks that ethics are only forced by regulations and that they are not moral duties, the business will focus on fulfilling the regulatory objectives only, without showing the real need for effective code of ethics. Certain literature has shown the importance of ethics in corporate world. The major area to be focused is the realization of the significance of ethics for better corporate performance. Without firm understanding of the basic grounds of ethical behaviour that impact profitability companies will not be able to emphasize more on ethics. Instead inappropriate code of ethics will diminish stockholder’s wealth. The merits of appropriate ethical behaviour affect all the key stakeholders to the company and the society as whole; There are certain merits highlighted in a study which includes economical outcomes, lawful behaviour, being good corporate citizen and retention of employees .Whereas the company could also bear the costs of unethical practices which negatively impact its profitability and its corporate image, several studies highlighted the demerits of unethical practices which includes pressure for greater accountability, fear of punishment and loss of customer value and imposition of fines. The relationship between ethical behaviour and stock performance, where stock performance will be the key indicator for shareholder’s wealth.