A public company is responsible towards many groups of people who are interested in the company. As a public company, there is the Government, creditors, debtors and shareholders who are interested in the functioning of the company as well as in the audit report and financial statements of the company. Every decision that the company takes, has to adhere to the Government laws and policies, it also is to be considered that the decisions do not affect the other groups adversely. Shareholders are investors in the company and they own a part of the company. Prospective investors also study a lot about the company and its financial reports, hence it is very important to show the correct results in the financial reports and be answerable to the shareholders.
Board of Directors and the CEO of a public company are responsible for the establishment of ethical system of working as well as accounting and so are they responsible for true and correct reporting of the financial statements. The CEO and the Board of Directors need to establish a system which follows ethical accounting and does not allow manipulation of accounts so as to show higher profits. Many companies which have suffered cases of fraud hold the CEO responsible for the same. The CEO should take tight measure to curb any manipulation in the accounting and only promote true and correct reporting in the financial statements. A team should be formed which reports the accounts and combines the information to provide to the external auditor. The external auditor is only going to look at the information provided by the members of the team, hence genuine data should be given which will then be audited and reported. Any member of the team should be demotivated from making changes to the information. Many a times, the financial statements are prepared and then some sort of window dressing is done so as to give wrong information to the investors as well as the shareholders about the position of the company.
For a CEO to implement an ethical environment, he needs to begin from the grass root level. Only when the information from the lowest level will be reported in the correct manner, the financial statements will be prepared in ethical and good quality. Hence, the CEO should ensure that there are adequate internal controls established in the company, effective leadership and efficient communication is also necessary so as to ensure that each member follows the rules established. Effective internal controls will stop the manipulation of accounts from the lowest level and hence the reporting will be genuine. Once the information is received, it should be scrutinized and only then provided for external audit. The figures and facts given in the reports should be thoroughly checked and no window dressing should be permitted.
Forecasting of the financial statement should be realistic as well as ambitious. The information in the same should be based on the current financial condition of the company but the same should be as realistic as possible. It is not acceptable to lure the investors with high levels of growth than practically possible. Before the financial statements are released to the public, they should be corrected and verified. The CEO is responsible for any false statement that goes in the statement. If needed, the CEO will be required to change the people who construe the work and lead to conflict of interest. Creating and sustaining a culture of good ethics will take time but will also go a long way. The CEO will be required to lead the organization in terms of compliance, corporate governance and ethics. Most importantly, the CEO will have to explain the importance of ethical accounting and establish effective leadership which will ensure that the employees are not tempted to manipulate the information and report it. Strict action should be taken against the employees who change the information and provide false information to the Board of Directors.
The corporate management can provide assurance to the investors that the expected earnings will be managed by showing them the progress of the company as well as the earnings based on the interim reports. The management can also show them a detailed forecast and a plan for performance which is based on the current levels of achievement. Management should have another plan ready which it can use if something goes wrong. Basically, performance and any deviation from the same can be noticed from the budgets and if the functioning of the company does not work according to the budget, the management can make changes and work accordingly. Interim reports should be prepared and shown to the investors so that they are assured about the earnings and the future growth of the company. If the company performs as predicted, there will be less volatility in the stock price except for the changes which are out of control for the management. Even if 80% results are achieved, the investors are assured of their investment and the safety of their money.
Many companies have faced the situation where there is lack of quality in reporting and preparing of the financial statements. Multinational companies have faced suits and have had to declare bankruptcy because of unethical reporting. Lack of quality in financial reporting leads to misleading of the investors and the shareholders; it also shows the lack of efficiency of the outside auditors. Manipulation of financial statements, also known as window dressing is considered as unethical and many employees tend to do it to hide their faults or to show that the company is progressing well. Though this is discovered eventually but the consequences are not really good. The company gets bad publicity; the CEO and the Board of Directors have suits filed against them as well as the auditors who reported about the financial statements. The company ends up declaring bankruptcy and usually has to put a lot of property on stake.
These consequences can be minimized by a change in mindset and the work culture. Ethical behavior should be imbibed in all the employees and they should be taught to follow the same. Effective leadership plays a huge role here. The CEO should ensure that all the employees are aware and efficient toward ethical behavior as well as its importance. The mindset should change from the grass root level so as to reach the top most level. This requires a lot more than laws and regulations.
The Sarbanes Oxley Act mentions that the companies will provide true and correct information in the audit report. Monitoring of professional ethics is important while preparing the audit report. This can be achieved by maintaining independence of the auditors work and not putting any pressure on him. The Board may set standards based on professionalism and ethics which are required to be followed by the members as well as professionals working under them. Though these measures are essential for the achievement of ethical standards and improving the quality of financial statements, it is equally necessary to make and follow the rules and regulations within a company. The requirements are not sufficient because many cases of fraud have been noticed in the recent times. Hence, it is important that the external auditors stay true to their profession and maintain a professional attitude at work, only then the public companies will not be lured to manipulate the accounts so as to show that they are fast growing, profit generating companies.
Hence, it is essential that the companies declare their current state of affairs as it is and do not mislead the investors who are watching them closely. The first to go off guard are the board of directors who have manipulated the accounts and they get into a trap which leads the company to a downfall.
References
Alton, L. (2015, May 28). Report: ‘Unethical Behavior’ Continues to Plague Financial Services Industry. Retrieved from Business Ethics: http://business-ethics.com/2015/05/28/0920-survey-unethical-behavior-continues-to-plague-financial-services-industry/
Corporate performance: what do investors want to know? (n.d.). Retrieved from Pwc: http://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/investor-view/investor-survey-edition.html
Sarbanes Oxley Act. (n.d.). Retrieved from http://www.sarbanes-oxley-act.biz/SarbanesOxleySection103.htm
The Consequence of Unethical Business Behavior. (n.d.). Retrieved from Six Sigma Online: http://www.sixsigmaonline.org/six-sigma-training-certification-information/the-consequence-of-unethical-business-behavior/
Thornton, L. F. (2014, Feb 24). How to Create An Ethical Work Environment. Retrieved from Fore Front Magazine: http://www.forefrontmag.com/2014/02/creating-ethical-work-environment/
Wahlen J. Baginski, S. &. (2011). Financial reporting, financial statement and valuation : A strategic perspective (7th ed.).
Williams, C. P. (2009, Sept 13). Why Ethical Organizations Outperform Their Peers. Retrieved from Diversity Mba: http://diversitymbamagazine.com/ethics-and-values-in-leadership-an-organizational-profile
