Write a 10001350 word essay based on the topic you chose in

Write a 1,000–1,350 word essay based on the topic you chose in Unit 3.

Include the following in your essay:

Identify an underlying ethical issue (like the ethics associated with earnings management decisions).

Critique of ethical situation

Determine who could be harmed by the ethical situation

Assess the potential outcomes of the ethical situation from an accounting perspective

Evaluate how these decisions could be avoided or prevented.

Include a reference list incorporating a minimum of three credible sources and a title page.

Solution

Management of an organization takes important business and managerial decisions based on the reported financial statements. The management converts the data from the financial statements into information that can be used to take prudent and rational management decisions. The state of the business can be measured using different analytical techniques.

Ethical issues: Management of a company should take all steps and measures to provide fair and accurate reporting of the financial position of the business. There should be no falsifying of documents and vouchers, there should be no allowing deductions which are seemingly inappropriate, there should be no illegal evasion of income taxes and there should be no intent of fraud.

Management can commit fraud in financial statements in several ways. Some of the ways are: to show fictitious revenue in the books to inflate topline, to conceal liabilities and expenses to artificially bloat the bottomline, doing wrong asset valuation etc.

Now, there are two types of financial statement reporting - (i) financial accounts that are used to report to the shareholders of the organization (ii) internal management accounts that are used to show the internal operations of the company and its summary and position of financial activities.

The internal stakeholders and the external stakeholders can be harmed by the ethical situation. The external stakeholders like the stockholders of an organization relies on its financial statements to take important decisions whether to increase or decrease their holdings in that particular company. Internal stakeholders like the employees, suppliers, vendors usually use the internal management accounts to make decisions. These internal stakeholders can end up taking the wrong decisions which in turn will harm their financial health in the future. For instance, if an organization is artificially inflating its revenues, the associated suppliers will think that the company is growing at a good rate and will be keen to maintain and expand their relationship with the company. However, this is based on a false premise. Thus, people relying on the financial statement reporting can be harmed by the ethical situation.

Potential outcomes of the ethical situation from an accounting perspective are: (i) wrong horizontal and vertical analysis of the financial statements will be done (ii) ratios of financial statements will not reflect the true picture of the business operations

These decisions could be prevented by ensuring that strong internal control processes are in place.

Internal control is a process which helps an organization achieve its objectives toward operational efficiency and effectiveness.

Internal control helps in risk mitigation by detecting and preventing fraud.

The components of the internal control process are: (1) The control Environment (2) Risk Assessment (3) Control activities (4) Information and Communication and (5) Monitoring.

The control environment refers to the policies and practices as put in place by the top management of a company. The control environment consists of organizational structure, management’s philosophy, HR policies etc. Risk assessment involves identification and analysis of risks. Control activities refer to the policies and procedures that management has established to meet its objectives regarding financial reporting. Information and communication refer to the activities used to record and process an organization’s transactions. Monitoring is the last component of the internal control system. This involves periodic assessment of the quality of internal control process. If the quality is found to be lagging then modifications will have to be made in the internal control systems.

Reference list:

1. http://businessperspectives.org/journals_free/im/2006/im_en_2006_03_Zager.pdf

2. http://onlinemasters.ohio.edu/the-role-of-financial-statements-in-managerial-decision-making/

3. http://accounting-simplified.com/purpose-of-financial-statements.html