In recent history, there have been quite a few memorable cases of corporations manipulating financial reports in order to deceive stakeholders. Deceptive accounting practices are like a disease, and should be rooted out immediately. These practices undermine the stability of U.S. financial markets, and can make people less willing to invest in stocks. Financial reporting is the key to maintaining trust in the financial system and any manipulation should not be tolerated.
The purpose of financial statements
Financial statements are the primary instruments used in assessing the performance of a business and its managers (Gibson , 2013). In order to make well informed decisions, interested parties must be able to assume that a company’s financial statements are an accurate representation of its performance. Financial statements are used by customers, employees, governments, investors, lenders, and suppliers to influence numerous types of transactions. Investors can use financial statements to determine a company’s value as an investment. Governments can use financial statements to determine a company’s tax liability. Lenders and suppliers can use financial statements for determine a company’s creditworthiness. Good decisions rely on accurate financial reporting.
An article titled; The Dangerous Morality of Managing Earnings, by the National Association of Accountants (1990) as cited by Gibson (2013), highlights a broad range of questionable financial reporting practices that many managers at many levels suggested were acceptable in the name of meeting their objectives. According to the article, many managers stated that taking unproductive actions to boost short-term earnings was acceptable because the accounting records accurately reported outcomes (Gibson , 2013). When manipulations occur in operations, managers tended to have a more favorable view of the questionable practices than when the manipulations occurred strictly on paper even though many of these manipulations included activities which reduced profitability.
Oddly enough, managers found manipulations that increased earnings less palatable than those that decreased earnings and the larger the effect on earnings, the less acceptable managers found the practice (Gibson , 2013). Perhaps manipulations that increase profits reported create some feelings of guilt whereas creating a decrease in reported earning neutralizes those feelings. One would think that increasing earnings would always have a positive connotation, as it is a primary goal for every manager. A wise manager, however, would know that shifting sales from future periods to the current period is just kicking the can down the road, and at some point any production shortcomings will come to light. Furthermore, managers reported that managing short-term earnings at quarterly reporting periods was less egregious than doing so for annual reporting periods (Gibson , 2013). This attitude is likely related to the...