Good Example Of Financial Reports Objectivity And Neutrality Creative Writing
There are increasing concerns over the issue of financial reports objectivity and neutrality. That is because the concepts are of importance in enhancing public trust and reliability by the stakeholders who need to use those reports for various decision-making purposes. However, there are increasing cases of misleading financial reports resulting in misguided decision making in the modern business world. Investors and stakeholders heavily rely on the objectivity, neutrality and integrity of those responsible for preparing financial statements (Hines, 1988). However, when that fiduciary bond breaks, the reliability of financial reports is called into question, and any confidence invested in the reports is destroyed. In that view, this essay explains whether financial reports can be considered as being objective and neutral with reference to the Enron case.
Objectivity is a quality and a state of mind that lends value to services. It acts as a distinguishing feature in the accounting profession and imposes an obligation for being impartial, free of conflicts of interest as well as being intellectually honest. However, independence precludes any relationship that could appear to impair the objectivity in rendering the attestation services. For Auditors in public practice, maintaining objectivity as well as independence requires continuing assessment of their client relationships and public responsibility. Thus, those providing attestation services and auditing should be independent in appearance and fact. In providing all services, Auditors should maintain objectivity as well as avoid conflict of interest. (Hines, 1991)
Further, when a business gets audited, it is expected that the accountant is impartial in their evaluating as well as reporting the business financial condition. The reason is that FASB has standards GAAP and one of the standards are neutrality. Independent Standards and Practices indicate that Accountants are expected to guard their independence and follow practices that are based on careful considerations of ethics and accuracy. In addition, accountants are not to influence behavior, or even present figures in a manner that encourage a particular decision. Thus, in giving information and preparing financial reports, accountants are expected to ignore the stakeholders’ interests. By the same token, a business that is being audited should not act to influence any aspect to suit any stakeholders interests. (Leauanae & Rasmussen, 2015) Finally, accountants following neutrality standard of GAAP should not favor a party interested in the outcome of an evaluation of an organization. For instance, if shareholders are concerned about an organization’s profitability, the accountant should not attempt to portray the organization to look more profitable (Gillan & Martin 2007).
Financial reports have a crucial objective in line with organization’s management; that of inducing behaviours relevant to management’s value creation. They are taken to constitute a signal or a stimulus meant to produce desired behaviour that is considered opportune as well as adequate and relevant. That is to say, that the reports are usually in conformity with either management and investors interest rather than the guiding principles of objectivity and neutrality. For instance, the objective of financial reports might be to contribute to financial flows transparency in order as a way of introducing an ethic into a business life in which case accruals accounting could perhaps be unnecessary. However, possible alternative could be that the reports objective is stimulating investments thanks to accelerated depreciation of fixed assets to reduce corporate income taxes or distributable dividend. In that view, Hines has the view that financial reports are mainly tools used by management to achieve their objective of value creation rather than for presenting the actual organization’s value. (Hines, 1991)
According to Hines (1998), reality is a creation through the self-fulfilling prophesy. That is because organizations mainly create situation that investors, and the markets respond to hence finally making the created situation a reality. That has been applied to various organization that have succeeded and grown in their markets just to be realized later that they manipulated the market through their financial reporting. In addition, the modern day business world is marked by increasing pressure on various stakeholders hence a push to achieve results through any means. That has greatly challenged the accounting and auditing functions with accountants and auditors increasingly becoming pressurized to serve the organizational and particular stakeholders’ needs rather than present an objective and neutral evaluation and reporting regarding organizations operations and positions. A good example is the Enron case that demonstrated that financial reports can be objective and neutral but are subject to manipulation creating an impression of reality as desired by the stakeholders rather than presenting the actual reality of the organization’s position. (Leauanae & Rasmussen, 2015)
Enron Corporation was as a gas pipeline company whose Board of Directors waived ethics rules in 1999, to allow the chief financial officer retain his position while at the same time running complex transactions through some private partnerships that were known as special purpose entities. (Li, 2010) The Board became conspicuously quiet, ignoring the needs to either monitor the CFO’s activities or track their transactional profits. It was later identified that most of the significant transactions through he entities were designed with a purpose to portray a favorable financial position, rather than achieve a true economic objective. Thus, some of the transactions done at the direction of the company’s CFO were on terms that were unfair to Enron with little economic sense. (Leauanae & Rasmussen, 2015) Throughout the period of the financial reports’ manipulation, the Chicago-based CPA Andersen acted as Enron’s outside independent auditing firm, engaged to ensure the company's financial reports complied with financial disclosure standards but was also involved as the company’s consultants. The dual functions subjected Andersen to conflict of interest that resulted in the auditor being under intense scrutiny by Congress. (Li, 2010)
In that respect, the company’s CFO failed to act in an objective manner with the company reporting positions that were not in line with its actual performance. The lack of objectivity created a different reality with the investors responding to the false report and driving the company towards further growth. On the other hand, the auditor failed to act in a neutral manner as would have been expected of them. That is because they ignored the transactions and processes that sought to serve particular individuals interest rather than being neutral and enhancing an objective and neutral reporting with a thorough evaluation and disclosure of such manipulations. (Hines, 1991)
In view of the Enron’s conduct, it is clear that financial reports do not necessarily feature objectivity band naturally owing to the possible manipulation that can be carried out by the accounting function and the management’s neglect to address such issues. In addition, possible collusion with auditors such as the case of Anderson taking dual functions as an auditor and consultant for Enron, is a great cause of financial reports failure to feature neutrality and objectivity that is expected and set out by the accepted international accounting standards (Gillan & Martin, 2007).
In view of the analysis, it is clear that financial reports may fail to meet objectivity and neutrality requirements. That owes to the increase in stakeholders interest and the need to address those needs by creating reports that portray an organization in the manner that the stakeholders would expect rather than presenting the actual position by the accountants and auditors taking an objective and neutral view that they are expected to take. That finding is in line with Hines view that financial reports are a part of a company’s communication strategy that seeks to promote a certain perspective favoring the organization in the stakeholders perspective. The reports are used to create a value perspective that the market responds to hence creating the real value as expected by the company’s management. In that view, without suitable changes in how audits, as well as related consulting services, are sold, managed and performed, quality of audited financial reports will fail to meet objectivity and neutrality requirements. In addition, if the check and balances that are the contemporary audit process are allowed to continue uncorrected, the trouble such as that faced Enron will continue with financial reports presenting stakeholders’ interests rather than organizations actual position in an objective and neutral manner. In conclusion, financial reports can only feature neutrality and objectivity if the conflict of interests inherent in modern business world is governed by effective governance codes and policies.
Gillan L, & Martin D. (2007). “Corporate Governance after Enron: Effective reforms, or closing the stable door?” Journal of Corporate Finance, 13.5 (2007): 929-958.
Hines, R. Financial Accounting: In communicating reality, we create reality. Accounting. Organizations and Society, 13.3 (1998): 251-261.
Hines, R. “The FASB’s conceptual framework, ﬁnancial accounting, and the maintenance of the social world. Accounting, Organizations, and Society 16.4 (1991): 313–331
Leauanae, J. & Rasmussen, D. “Truth or Dare: Assessing the Reliability of Financial Statement”. Sage Forensic Accounting. Web. 22 March 2015. http://www.sagefa.com/articles/Truth%20or%20Dare.pdf
Li, Y. The Case Analysis of the Scandal of Enron. International Journal of Business and Management. 5.10 (2010): ISSN 1833-3850: E-ISSN 1833-8119
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