Ethical Issues in Business Administration

Abstract

Ethics is a major issue in the accounting and finance section of business administration. Therefore, in this paper, the five major ethical issues are highlighted and ranked based on their relevance in the field of business administration. Faking of financial records is a major concern in financial accounting. This paper will evaluate the ethical issue of fraudulent financial reporting. It will also asses its relevance in the field of study and the impact that it has on the current and future stakeholders of the organization. Also, the most viable recommended course of action is postulated to mitigate the vice in the business sector. Misappropriation of organization assets, disclosure, greed and pressure from the top management are other ethical issues that will be evaluated in the research paper. This evaluation is based on the impact that the ethical issues have in business administration, their relevance and the recommended mitigation measure to be enacted.

Top Five Ethical Issue Is Business Administration 

Finance and accounting is a vital subsection of business administration. The growth of any organization depends upon the mechanism adopted in financial analysis and reporting. Generally, the future of accounting and finance is at risk. Therefore, it is important to establish proper ethical standards for a healthy business environment. The collapse of Enron is an example that highlights how ethical issues in finance and accounting have become dangerous in the business industry (Siskos, 2014). Ethical issues are mainly concerned with nurturing good practices in an organization. However, there are five major ethical issues that dictate the success of the finance department. Disclosure, fraudulent financial reporting, misappropriation of resources, greed and managerial influences are the top ethical issues exhibited in business administration. 

Faking of financial reports is a major ethical issue in finance and accounting. Most of the scandals that have been reported recently on media are instigated by fraudulent financial statements. This issue is normally carried out intentionally by the top management in order to have the stock prices high enough to attract more investors. However, this practice has led to the collapse of huge corporations in the world. Furthermore, there are so many factors that coerce an accountant to fake financial records in an organization. Poor documentation is one of the factors that coerces an organization to provide fraudulent financial reports. Record keeping is a basic element that dictates the probability of a financial officer to fake numbers. Also, the pressure from top management can result to fraudulent financial reporting since the accountant will be under intense pressure to replicate the estimates required by the executives. In most cases, investors usually consider an organization’s financial statements as the basic tool for determining whether to invest or not. Therefore, it is ethically wrong to provide investors and creditors with the financial statement that have been manipulated. Faking of financial statements is ethically wrong since it misleads the investors on the organization’s viability in the industry. This may even lead to the collapse of an organization due to its failure to live up to investors’ expectations. 

Fraudulent financial reporting is the highly ranked ethical issue in finance and accounting. This is because most of the recent scandals in huge organizations have directly been linked to manipulation of financial records. In 2005, Enron which is a major player in the energy sector of America collapsed due to fake financial records (Siskos, 2014). The subsequent investigations corroborated that Enron had been posting fake financial records for many years. This evidence caused the stakeholders of Enron to lose almost $25 billion to the petitioners (Siskos, 2014). Also, the accounting firm that was involved in the saga was also affected since it lost almost 85000 of its employee base (Siskos, 2014). This example helps to affirm that faking of financial records is a major ethical issue in the business sector. 

An ethical issue of faking financial records has much relevance in the organizations’ operations and its relationship with creditors, investors and the public. Therefore, it is fundamental to ensure that the financial records of an organization are clean and generated based on the stipulated ethical standards (Beatty, Liao & Yu, 2013). This is because financial records provide a means through which an organization can evaluate its past successes and also determine the future expectations. Financial records are also very important to the creditors and investors since they are the major providers of capital in an organization. Therefore, proper financial statements ensure that the creditors and investors are able to access correct financial information. Also, the ethical issue of fraudulent financial reporting has a major bearing on the decisions made by current and future stakeholders. If the company is involved in unethical manipulation of financial statements, then the current stakeholders may not be in a position to make proper decisions based on the company’s financial reports. This practice may coerce the largest portion of stakeholder to look for other viable business opportunities which may taint the organization’s image towards attracting other potential stakeholders. 

This ethical issue can be apprehended by imposing proper accounting guidelines that will ensure that all the lope holes are sealed. However, this process demands a sober social responsibility from leaders. For instance, the federal government imposed the Sarbanes Oxley act to neutralize the manipulation of financial records manifested in Enron (Willits & Nicholls, 2014). It is also a social responsibility of the financial officers to adopt the IMA ethically acceptable code of conduct. These guidelines help to provide acceptable accounting standards that can mitigate malpractices such as faking financial records. FASB and IASB have also provided proper recommended accounting guidelines that can be used to restore proper ethics in business administration (Kidwell et. al , 2013). 

Misappropriation of assets is another key ethical issue in the business sector. Basically, asset misappropriation is concerned with the utilization of an organization’s resources for personal benefits. For example, when the CEO of the organization embezzles funds for his or her own use without indicating withdrawals in the financial records. Misappropriation of organization resources is ethically wrong. This is because an accountant will not be in a position to account for the missing funds thus coercing him or her to fake the records. This ethical issue is ranked second because it is popular in all the levels of the organization. In comparison to the fraudulent reporting of financial statements, misappropriation has a lesser impact on the company’s downfall. Therefore, this helps to justify its rank. In most cases, the misappropriation of assets can only hurt the organization much when it’s done on a large scale. However, a large scale misappropriation of assets can easily be detected and traced before it affects the company’s progress. 

Misappropriation of company assets can negatively affect the organization in numerous ways. Financial loss is one of the consequences of this unethical practice. A consecutive financial loss may lead to the company’s failure since its capital base is ultimately reduced in the process. However, this malpractice depends on the social responsibility of the top management and other employees. The adoption of good ethical practices can help mitigate this vice. Also, the misappropriation of company assets has a direct impact on its external confidence and viability in the industry. For instance, if a large scale loot has been uncovered, the company may experience a backlash from the public. This may taint its image in the public domain. Also, it may have a greater influence on the stake holder’s benefits and their overall image in the society. Furthermore, the publicity of this unethical practice may hurt the company’s ability to attract more investors in the future. 

Misuse of an organization’s assets can be mitigated by enforcing proper corporate ethical education. This education will ensure that the employees are aware of the stipulated ethical guidelines of the organization. It can also, be mitigated by issuing stun warnings to any employee found misappropriating the organization resources. This may deter employees from getting involved in the malpractice. However, it takes a collective responsibility of both the executive staff members and other employees to report cases of asset misuse. Therefore, reporting of such victims will pave way for the mitigation of the vice. However, this process can only be successful if the organization leaders are committed to ending the vice. For instance, a CEO who is involved in embezzlement of funds cannot properly mitigate this issue since he or she is the main perpetrator of the vice. Therefore, the issue of social responsibility plays a crucial role in this situation. 

Disclosure is also an important ethical issue in business administration. The issue of disclosure generally implies unethical omissions imposed to mislead investors. However, this omission can be in terms of business transactions. For instance, the organization may decide to disclose its losses from investors in order to impair their investment decisions. This is unethical practice since it is both dangerous to the organization and investors. In the field of business administration, this ethical issue is ranked third because it is an element of fraudulent financial reporting (Zadek, Evans & Pruzan, 2013). The omission of some transaction in order to attract more investors is related to fraudulent financial reporting. 

The ethical issue of disclosure has a long-term impact on the company’s future success. An organization that engages in this unethical practice may experience a subsequent withdrawal of investors which may have a negative effect on its capital base. In the event that the investors are not benefiting from their venture, withdrawal of the shares is the most common course of action. This withdrawal may also have a negative impact on the company’s public image which may instigate its ultimate downfall. The ethical issue of disclosure is also relevant when it comes to evaluating the performance of stakeholders. For instance, if this malpractice is uncovered, the current shareholders of the organization may have a bad reputation in the public domain which may taint their chances of getting involved in other ventures in the future. This malpractice may also limit the chances of the organization to attract other stakeholders in the future. 

The leaders’ social responsibility may play a crucial role in mitigating this vice in the business sector. This is due to the fact that nurturing of ethically acceptable standards in an organization entirely relies on the collective social responsibility of the top management and other employees. In regard to this issue, the disclosure standards are properly enumerated in the accounting and finance Act. This ensures that the organization only discloses certain private information as stipulated by the law. However, the enactment of this policy is based on the social responsibility of leaders to implement this code in all the levels of the company. In most organizations, the CEOs have enforced efficient disclosure standards in their finance and accounting department which have helped to mitigate the vice (Weiss, 2014). 

Pressure from the management is also an ethical concern in finance and accounting. This unethical issue normally occurs due to provision of more power to a given executive position. Therefore, the officers in these top executive positions may use their power to pressure the low-level employees to produce the expected financial results. This pressure may result to fraud in financial reporting. In comparison to other ethical issues, this concept is ranked fourth because it has a lesser scale of impact on the organization. It is also ranked fourth because it is one of the factors that instigate officers to indulge in faking financial records. Since, the passing of the Sarbanes Act in 2002, accounting malpractices have increased on a large scale (Willits & Nicholls, 2014). However, this increase can be attributed to the pressure being imposed by the executive members of the organization. 

This issue is of much importance in a company since all of its operations depend on the managerial mechanism used. Therefore, the executive members of the organization have the social responsibility to ensure that they don’t provide much pressure for the low-level employees in the organization. In most organizations, this ethical issue is mitigated by enforcing a code of conduct for the executive staff members. Pressure from the top management can also be mitigated by setting reasonable goals that do not strain the low-level employees in their field of expertise. This will help to lessen the pressure that finance officers are put into. 

Greed is also an important ethical issue in accounting and finance. A staff member who is mainly motivated by his or her own personal bank is at risk of being involved in fraudulent practices in the organization. This practice may hurt the company especially when an accountant is involved. This is because an accountant is an important staff member who ensures that the company’s financial records are well kept. In the event that he or she gets greedy, then the organization may suffer from unnoticed fraud in its financial sector. Therefore, such an individual becomes a liability in the organization’s path to success. This ethical issue is ranked fifth because it is among the primary factors that instigate fraud in an organization (Effelsberg Solga & Gurt, 2014). In comparison to other ethical issues in finance and accounting, greed stems from a personal level. However, this ethical issue entirely relies on a personal ability to follow the professional code of conduct. This is majorly centred on the social responsibility at a personal level. 

This ethical issue may have a negative impact on the decisions made by the current stakeholders. Greed among accountants may ultimately affect the growth of the organization since decisions are made based on fraudulent financial reports. In order to mitigate this malpractice, the organization should ensure that the staff members dealing with delicate resources such as financial records are well paid. This policy will ensure that staff members have enough financial cover which lessens their greed. Also, strict accounting procedures should be enforced to ensure that the financial team works within the set guidelines. This will ensure that tracking of fraud is made easy since standard accounting procedures are followed. However, this whole process basically relies on the personal responsibility to work within the given restrictions stipulated in the professional code of conduct. 

References

Beatty, A., Liao, S., & Yu, J. J. (2013). The spillover effect of fraudulent financial reporting on peer firms' investments.  Journal of Accounting and Economics ,  55 (2-3), 183-205. 

Effelsberg, D., Solga, M., & Gurt, J. (2014). Transformational leadership and follower’s unethical behavior for the benefit of the company: A two-study investigation.  Journal of Business Ethics ,  120 (1), 81-93. 

Kidwell, L. A., Fisher, D. G., Braun, R. L., & Swanson, D. L. (2013). Developing learning objectives for accounting ethics using Bloom's taxonomy.  Accounting Education ,  22 (1), 44-65. 

Siskos, D. V. (2014). Enron Corporation: A Sinful Company with Equally Sinful History. 

Weiss, J. W. (2014).  Business ethics: A stakeholder and issues management approach . Berrett-Koehler Publishers. 

Willits, S. D., & Nicholls, C. (2014). Is the Sarbanes-Oxley Act Working?.  The CPA Journal ,  84 (4), 38. 

Zadek, S., Evans, R., & Pruzan, P. (2013).  Building corporate accountability: Emerging practice in social and ethical accounting and auditing . Routledge.