In recent years, many financial scandals have come to light in the media. Companies such as Enron, WorldCom, and AIG have experienced significant scandals due to unethical and sometimes illegal accounting practices. It is important for companies to prepare financial statements correctly and legally to avoid punishment, but also to have an honest relationship with customers and stockholders. Accurate accounting plays a vital role in business.In this post, we will discuss specific steps employees and employers can take in order to ensure ethics in financial reporting.
*Note that some aspects of accounting can be complicated, so it’s always best to consult with your accountant or lawyer if you have questions.
To ensure ethics in financial reporting, it’s important that all users of the financial systems understand the Generally Accepted Accounting Principles (GAAP)* and the Sarbanes-Oxley Act (SOX)*. These will give users guidelines so that accounting can be performed legally and ethically.
Also, there are three important steps that can be used when facing ethical dilemmas.
1. Recognize an ethical situation and the issues involved. Employees can use their own personal ethics in order to identify situations and issues related to accounting. Some companies even provide employees with ethics codes and written agreements or training sessions.
2. Identify the principal elements in the situation. This step involves identifying the stakeholders or groups of people who would be harmed in the situation. Employees of the company can also ask themselves: What are the responsibilities of the involved parties?
3. Identify the alternatives. The final step is to select the most ethical alternative, considering all consequences.
In order to ensure that those preparing financial statements are ethical, refer to this three step process when making decisions.
*GAAP and the Sarbanes-Oxley Act are described in more detail in our accounting tutorial which can be found here.