Materiality is defined by the FASB as an omission that would affect a normal person by a misstatement such as using earnings management to skew the true earnings or revenue. This calls in to play the unethical behavior that earnings management places on the public (violating AICPA Code of Professional Ethics). SOX further required management and accountants to be cognizant of the material errors that financial misstatement and false reporting could have from an ethical standpoint. It holds them accountable for all financial reporting from their company. This includes criminally and financial accountability.
Impact of Unethical Behavior Analysis Impact of Unethical Behavior Analysis With a rich history in financial scandals, organizations need to protect themselves against bad publicity. The scandals highlighted the need for legislation. “Congress passed the Sarbanes-Oxley Act (SOX) to provide greater protection against corporate and securities fraud for public companies, mandating stronger internal controls, independent audit committees, the creation of anonymous hotlines, and, importantly, the implementation of safeguards against retaliation.” (Bannon, Ford, & Meltzer, 2010). While the effectiveness of the legislation has been heavily debated, there are still opportunities for unethical behavior. Top executives of companies are hired to improve performance and the pressure to do so can lead them to take unethical action to ensure their success.
A high stock price decline after an earnings announcement can often be a reason for investors to accuse a company for having withheld important information. In order to avoid these legal costs a manager can preempt the disclosure of a large negative earnings surprise. Such voluntary disclosure makes it harder for plaintiffs to claim a manager withheld information as the plaintiff cannot know exactly when the manager obtained the bad news. It also limits the time period of nondisclosure and thereby the possible damages which can be claimed.51 The voluntary release of earnings forecasts can also be beneficial for a company. When there are changes in the environment of a company and managers release an adapted earnings forecast, they demonstrate their ability to anticipate future changes.
Executives are hired to act as fiduciary agents of their stockholders for the purpose of increasing wealth (Smith, 2003). He argued that CSR amounted to spending the stakeholder’s money that clouded decision making by reducing the firm’s focus on maximizing profits, thereby placing the firm at a competitive disadvantage (Smith, 2003). Friedman’s approach is practical and takes into account the interests of both firms and society. However, it is not realistic to think that a firm can separate business and social responsibilities. According to Mintzberg "the strategic decisions of large organizations inevitably involve social as well as economic consequences, inextricably intertwined...there is no such thing as a purely economic strategic decision."
The advantages are obvious. It is thought that such institutions take positions that are high-risk, as they are able to leverage these risks based on the policy preference they receive. So, a government would intervene to prevent its failure or, at least, limit the losses to uninsured creditors upon failure, if a large organization were to get in trouble. In general, a bank tends to become larger and riskier if its uninsured creditors believe that they will benefit from TBTF policy. The next issue is a role of TBTF institutions.
If deferring this revenue will not be acceptable to the company's auditors, management would prefer to treat these "excess" sales as consignment sales, with the recognition of revenue taking place in 2001 or when the bottler eventually sells this product. CCL has approached you, Erin Greene, CMA, to provide an analysis of the financial accounting issues
I conclude that although the abuse of the profession by investment institutions aggravated the financial crisis, accounting cannot be said to be a root cause. Second, I look at the potential of accounting to help with the resolution of the financial crisis. I argue that by enhancing the accounting standards and acting to eliminate weaknesses therein, accounting can play a significant role in aiding the global economy to recover. Several allegations have been made against the accounting profession, accusing it of precipitating the financial crisis. Of these, I believe two in particular depict the role of accounting in the financial crisis, these being the effects of fair values and the overly complex (and thus allegedly detrimental) nature of financial reporting.
(1) Earning Management According to Ronsner (2003), earning management is defined as a management technique that can let managers achieve their outcomes by influencing the financial statements. These actions will mislead some stakeholders’ opinion about the company’s underlying economic performance; Also, earning management can influence the contractual outcomes which come from accounting numbers (Healy and Whalen, 1999). In Worldcom case, CFO Sullivan use accounting entries to reach targeted performance, this improper earning management tried to conceal the real economic value and performance of Woldcom from the stakeholders who will use the financial statements. (2) Motivations of earning management The reason of earning management is to affect financial statements’ users’ understanding about the company’s economic performance or influence the outcomes which depend on the reported accounting numbers (Lin, Radhakrishnan & Su, 2006) Firstly, one of the most important motivations of earning management is Managers’ career concerns. Because earning management allows managers to reach their desired outcomes by influencing firm’s financial statements.
Cases like Enron, Madoff and other fraud cases have left companies vulnerable regarding how to resolve potential problems that may be related to fraud. Fraud risk assessments, which is a series of assessments used to determine the likelihood of a member or organization “using deception to make a personal gain dishonestly for oneself and/or create a loss for another (Samociuk & Iyer, 2010).” Through the evaluation of the importance of fraud risk assessment and the elements of a good fraud risk assessment, one can better understand how fraud risk assessments can positively affect the success of a company. Fraud risk assessment is an important element of a successful corporation for several reasons. Most of these reasons revolve around a company's naivete to the potential for fraud. Most corporations state that they did not realize that they had a high risk of fraud, which causes one to ask whether fraud could be prevented (Samociuk & Iyer, 2010).
By identifying stakeholders, the corporation can decide which groups need to be managed. Freeman believed that there were moral, practical, and strategic planning reasons for attending to stakeholders. Corporate Social Responsibility (CSR) is a reason for moral attention to stakeholders such as the general public. By disregarding stakeholders, shareholder value can be destroyed. The stakeholder theory focuses more on who is being affected and that the leaders have an obligation to other stakeholders.