Every firm in the corporate world strives to establish itself in a highly competitive market. All organizations strive to increase their revenue, which helps them make a higher amount of profit. Making more revenue and profits improves the financial health of the organization. The financial status of an organization contributes to its success or failure. More often, an organization with excellent financial health attracts more customers and investors compared to poorly performing organizations. Investors are very beneficial to organizations as they help raise capital for the organization. The firms use various strategies to increase their market power and reach more customers to beat their competitors. The greed and need to achieve success have driven some of the organizations to use unethical means for proving the financial health of their organization. Manipulation of financial statements is unethical and morally wrong and plays a significant role in reducing transparency and misleading all the stakeholders in an organization.
Financial statement fraud is a conventional unethical means of proving financial health, and it involves manipulating the balance sheet, cash ratios, cash flow, and revenue to deceive people. The capitalistic nature of the corporate sector brings the need for people to use unethical means to survive and make profits. Most organizations do not care about investors or employees working for them but care for the profit they get. The Lehman Brothers Company became bankrupt due to various accounting frauds. The management of the organization brought new assets to the organization to make its loans look like assets (Montgomery, n.d.). Multiple laws have been implemented to regulate how businesses operate. Accountants are required by the law to keep all financial audit report for five years after the audit, according to section 1520 (Ceresney, 2013). The punishment of being involved in any accounting fraud if fine or imprisonment. Concealing of any financial information is a violation of section 78j (Federal Accounting Fraud Crimes, 2019).
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Manipulating financial statements is unethical and morally wrong. Virtue theory supports this moral position. The theory emphasizes on morals and positive character of individuals. It contrasts with the other theories in that it does not place much emphasis on duties and rules or the outcomes of an action (Virtue Ethics, 2016). The virtue theory is based on virtue and practical wisdom and is deep-rooted to its possessor. Virtue is based on reasoning and making decisions by the possessor. Wise people can view and analyze a situation and all its variables and determine the disadvantages of taking a certain action or benefit of taking another. The practically wise people, therefore, understand a situation and determines the important and highly advantageous choice and perform it to promote better and fair living. Virtues such as honesty should be used to help the investors and other stakeholders see the real information as a measure to enhance transparency.
Manipulating financial statements reduces transparency. Transparency is critical in business. Transparency involves revealing the right information about anything, whether it is financial or a product. Financial statements are significant to the investors, shareholders and potential investors. Information regarding the financial statements should, therefore, be transparent. The correct financial statements enable investors and shareholders to make the right decision regarding their investment. In cases where the financial statements show the health of the organization is deteriorating, all the stakeholders can come together and discuss ways to improve the performance of the organization. Failing to provide accurate financial statements misleads the investors and other stakeholders, which is against virtues such as honesty. Besides, manipulating the financial statement falsifies the actual position of the organization. People who would have helped get the organization out of the mud are unaware, which causes the status of the organization to deteriorate further.
Manipulation of financial statements misleads all the stakeholders. Some of them are the shareholders, investors, and the government. Altering the financial statements to falsify the condition of the organization makes all the stakeholders make the wrong decisions. In simple terms, accounting fraud inconveniences every individual involved in the business. Huge losses occur to the stakeholders if the condition of the organization does not improve even after they invested in the organization. The organization's image would be profoundly damaged if such an accounting fraud is uncovered. A poor image of the organization reduces its customers since the public trust has been lost (Gerety & Lehn, 1997). According to the virtue theory, this is unacceptable. The management should consider the investment of all the stakeholders and apply honesty in announcing the financial position of the organization and the expected trend. Displaying honesty boost the image of the organization and increases public trust.
The application of the virtue theory provides a better solution to this ethical problem compared to the other theories. The virtue theory protects all the stakeholders in the organization and the organization itself by providing a different option rather than fraud to prove the financial health of an organization. The theory offers transparency and honesty as a key factor that boosts the image of the organization. Revealing the poor performance will result in a sit down where solutions that could help improve the situation can be formulated by all the stakeholders together. Applying the deontological theory, which bases the morality of a certain decision or action on rules, would not provide a solution to the organization. Basing the solution to positive virtues displays the dedication of the organization to honesty and transparency. Deontological ethics does not show the strength of the organization but rather shows the power the rules and regulations have over the organization.
According to Khajavi and Ebrahimi (2017), highlighting manipulation as being unethical and immoral fails to account for the fact that the success or failure of a company depends on its ability to attract investors, who would be willing to make viable investments. In the case of the Lehman Brothers Company, the main reason why it focused on the manipulation of its financial statements is that it needed to paint a rosy picture for its investors. Khajavi & Ebrahimi (2017) indicate that executives consider the need to manipulate how a company is performing to bolster confidence among investors that would push them towards the company. By highlighting a company’s true financial position, it is much more likely to experience a situation where some of the investors may pull out their investments. The ultimate impact is that this would have a serious implication on the company’s financial performance. Petrova (2016) denotes that the relationship between independent auditors and corporate companies has made it much easier for them to manipulate their true financial position as a way of promoting overall confidence among investors. Auditors have a moral and ethical responsibility to ensure that what they report is accurate. However, many of the independent auditors today fail to achieve this ethical threshold, as they opt to report manipulated financial information.
The objection to the thesis reflects on how companies are likely to benefit from their manipulation of financial statements, especially in seeking to attract investment. However, the companies need to consider the fact that manipulation of these statements tends to have a serious impact on the position of their stakeholders. In cases where investors have uncovered the truth about financial statement manipulations, the companies involved have experienced a significant downturn in terms of their performance because of many of the investors opt-out (Kulikova, Akhmedzyanova, & Ivanovskaya, 2016). Inaccurate financial reporting tends to have a significant impact on a company’s credibility and corporate image not only with investors but also with other stakeholders including employees. In such cases, it may be somewhat challenging for companies to redeem their corporate position considering that it is impacted by the way they project themselves during financial reporting.
Another critical reason companies should not engage in the manipulation of financial statements regardless of what they expect is because it impacts preventive actions that would have been considered to deal with any deficiencies. When reporting inaccurate statements, companies fail to consider that these inaccuracies often serve as a cover-up for deficiencies that stakeholders would have handled to prevent significant impacts on the company’s performance (Jan 2018). An example can be seen from the case of Lehman Brothers Company, which failed to highlight that many of its mortgage customers were not in a position to pay back loans given, as the ‘real estate bubble’ had burst. When stakeholders uncovered the inaccuracies in the financial statements given by the company, the impact that this had was experienced throughout the United States, especially within the financial industry. The resulting outcome was that the country and other developed countries experienced a financial crisis. That shows the negative implications that are likely to result from the manipulation of financial statements.
In summary, companies strive to maintain their competitive advantage, which is projected by the revenues that they gain from their respective business models. Companies making higher revenues and profits are much more likely to be viewed as being successful compared to those that experience slowed performance. The need to project financial performance has pushed some companies to engage in the manipulation of financial statements. The statements are expected to project their financial positions as being much better as opposed to their true position. In some cases, companies engaging in the manipulation of financial statements are struggling financially and only use the manipulated reports to attract and lure investors. An example of a company that was engaged in manipulation of its financial statement was Lehman Brothers Company, which led to the financial crisis of 2008 immediately after this was uncovered.
Manipulating financial statements is unethical and morally wrong because it serves as an indication that a company is not being as transparent as it may be expected to its stakeholders. Manipulated statements intend to mislead investors, some of who believe that the financial statements reported are accurate. On the other hand, manipulation of financial statements is seen as being a viable approach by companies seeking to paint a rosy picture for their stakeholders, which would help push for more investment. The basic idea is that the manipulated financial statements are much more likely to attract more investors, which will help build the company’s financial position significantly. However, manipulation of these statements tends to have a serious impact on the position of their stakeholders and impacts preventive actions that would have been considered to deal with any deficiencies. In the case of Lehman Brothers Company, the company’s actions led to a financial crisis that did only affect the United States but affected other developed countries around the world.
References
Ceresney, A. (2013). Financial Reporting and Accounting Fraud . Washington, D.C.: American Law Institute, Continuing Legal Education. https://www.sec.gov/news/speech/spch091913ac
Federal Accounting Fraud Crimes. (2019). HG . https://www.hg.org/legal-articles/federal-accounting-fraud-crimes-5074
Gerety, M., & Lehn, K. (1997). The Causes and Consequences of Accounting Fraud . Managerial and Decision Economics, 587-599.
Jan, C. L. (2018). An effective financial statements fraud detection model for the sustainable development of financial markets: Evidence from Taiwan. Sustainability , 10 (2), 513.
Khajavi, S., & Ebrahimi, M. (2017). Modelling the effective variables for of financial statements fraud detection using data mining techniques. Quarterly Financial Accounting , 9 (33), 23-50.
Kulikova, L. I., Akhmedzyanova, F. N., & Ivanovskaya, A. V. (2016). Ways of assets value misstatement that companies use when making financial statements. International Business Management , 10 (24), 5705-5709.
Montgomery, A. (n.d.). Seven Pillars Institute . Seven Pillars Institute Website . https://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers/
Petrova, R. (2016). Financial statements reporting as a tool for manipulating the perception of accounting information. Бизнес Yправление , 26 (1), 15-34.
Virtue Ethics. (2016, December 8). Stanford Encyclopedia of Philosophy . https://plato.stanford.edu/entries/ethics-virtue/
