Ethical and Legal Obligations
Ethical and legal obligations apply to all members of society. As one in society, the obligation to act in an ethical, law abiding manner on a daily basis is vital to the integrity of daily life. Many professions have their own code of ethics. Financial reporting is not exempt from such ethical and legal standards. One’s lively hood depends on decisions made in the business world. Business transactions are done daily and can impact one’s economic stability. Trust is placed in the hands of corporate America and an obligation of financial reporting to reveal a complete honest and legal picture of an entity’s accounting practices is important in attaining trust. This paper will discuss the obligations of legal and ethical standards of practice in the financial spectrum.
According to Marshall, McManus and Viele (2004), accounting is “the process of identification, measurement, communication of information about a business for the purpose of making decisions and informed judgment” (p.3). Decision makers look at balance sheets, income statements, changes in the owner’s equity and cash flow statement as documentation of the viability of an entity. Misrepresentation of the financial statements can place doubt of profitability in any company. The need for accountability and regulation of accounting practices is important in preserving trust in the business community.
Entities have ethical and legal obligations in financial reporting. To ensure these obligations are upheld, agencies have been developed to regulate standards of practice. These agencies or regulators are the “Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB)” (Marshall et al., 2004).The FASB is the authoritative standard implementation body for the accounting profession according to Marshall et al. The mission of FASB is to “improve reporting, focus on traits that are important and reliable and on quality of comparison and consistency, to keep up to date with current trends to reflect modifications in methods used and economic changes, and to improve the common understanding of the purpose and content within financial report” (FASB, 2008). The FASB has an obligation to uphold ethical standards as well as to ensure rules and regulations are followed in the way of financial reporting. The FASB uses input from other agencies when developing or amending standards such as the SEC. Before the Great Crash of 1929, little was done to regulate the securities market (SEC, 2008). Two laws were created to help improve investor confidence: “Securities Act of 1933 and Securities Exchange Act of 1934” (SEC, 2008). According to SEC (2008) the purpose of these laws is to make sure companies display accurate...