Ethical Responsibilities of Financial Reporting of a Firm: An Overview

This report delves into the ethical responsibilities associated with financial reporting, examining the background, research objectives, and questions. It explores the importance of ethics in accounting, emphasizing how ethical practices lead to accurate financial reporting, which is crucial for corporate and individual financial activities. The literature review covers the usefulness of earnings, corporate social responsibility, sustainability declarations, and ethics in creative accounting. The research methodology details the research onion, philosophy, approach, design, and data collection processes, along with ethical considerations. Data analysis focuses on the concept and importance of ethics, fundamental ethical principles, and challenges within the auditing profession. The report addresses key research questions about auditor responsibilities, corporate governance, and the impact of ethics on financial reporting, culminating in conclusions and suggestions for future work. The paper highlights the significance of ethical behavior in maintaining investor trust and ensuring the reliability of financial data.

Running head: ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Ethical responsibilities of financial reporting of a firm
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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Abstract
This paper has been constructed in order to have an idea about the ethical responsibilities that are
associated with the process of financial reporting. The background with respect to the ethical
responsibilities has been put forth along with the research objectives and questions with the help
of which the paper can be completed in an effective manner. The review of literature explains
what the other researchers have explained with respect to the same topic. The methodology of
the research has been undertaken in order to have an idea about the process of data gathering and
the tools and techniques that has been used in order to filter the data in an effective manner. The
analysis of the data explains that ethics play a vital role in order to construct the financial
reporting and making use of ethics can lead to precise accounting that can be helpful for the
development of the functional activities of any individuals and corporations.

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Table of Contents
Chapter 1: Introduction....................................................................................................................4
1.1 Background............................................................................................................................4
1.2 Rationale for the Study..........................................................................................................5
1.3 Research Objectives...............................................................................................................5
1.4 Research Questions................................................................................................................5
Chapter 2: Literature Review...........................................................................................................7
2.1 Usefulness of the earnings.....................................................................................................8
2.2 Explaining Corporate Social Responsibility and Sustainability............................................9
2.3 Sustainability Declarations in Accounting..........................................................................10
2.4 Ethics and Creative Accoutring...........................................................................................11
Chapter 3: Research Methodology................................................................................................12
3.1 Introduction..........................................................................................................................12
3.2 Research Onion....................................................................................................................12
3.3 Research Philosophy............................................................................................................12
3.4 Research Approach..............................................................................................................13
3.5 Research Design..................................................................................................................13
3.6 Data Collection Process.......................................................................................................13
3.7 Ethical Consideration...........................................................................................................14
Chapter 4: Data Analysis...............................................................................................................15

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
4.1 Introduction..........................................................................................................................15
4.2 Concept of Ethics.................................................................................................................15
4.3 Importance of Ethics............................................................................................................15
4.4 Fundamental Principles of Ethics:.......................................................................................16
4.4 Ethical Challenges in Auditing Profession..........................................................................17
Chapter 5: Conclusion...................................................................................................................19
5.1 Future Work.........................................................................................................................20
Reference List................................................................................................................................21
Bibliography..................................................................................................................................25

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Chapter 1: Introduction
1.1 Background
A vital part of being ethical in the region of accounting is giving the investors with
effective financial data. An estimation can be undertaken that the companies that are sustainable
are intrinsically ethical than the firms who neglect to contribute to the preservation of the planet.
If these ethics are able to interpret in various facets of the organizations, then their financial
statements should theoretically be more effective than the ones that are less ethical as the
counterparts (Cheng et al., 2014). The organizations who do not think about acting in an ethical
manner will be more influenced to post inflated or misleading numbers in their financial reports
if it defines that the financial profits can be undertaken or they can otherwise meet any self-
interest influenced desires.
Effective ethics are discovered to be the biggest asset of the profession of accounting as
their job means nothing if the results cannot be trusted. Conversely, the accounting standards are
not always in the white and black and the managers have certain discretion as to how they want
to handle with any number of circumstances. Due to the goal of each firm is to increase the
profit, there are always a chance that a manager can be influenced to slant the numbers such that
the probable investors are likely to invest money (Parsons, & Moffat 2014). While this can lead
to the effectiveness of the organization executives, this deception can even make the investors
misinformed and decisions that are ill fated with their money. Therefore, it is essential to assess
the company ethics to make sure that the potential for effective investments and even play a field
for people who are risk averse who look for safer ways in order to invest their money that has
been hard earned (Fernandez-Feijoo et al., 2014).

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
1.2 Rationale for the Study
In the current time period, the fraud related to accounting and other corporate scandals
has rocked the equity market and their similar industries, defilement of the ethical responsibility
and the status of the top level management and the episode aftermath or leading to the downfall
of the large multinational organizations like Tesco, Enron and more.
1.3 Research Objectives
The paper concentrates on the ethical downfalls that lead to the disaster of the corporate
auditors and accountants in order to fulfil their accountabilities for the purpose of financial
reporting to the investors who are significant ones. They are vital for sustaining continuation of
the capital markets and the capital. The data on the enterprise success is a key connection among
the capital suppliers and the business firms who are making use of that capital. When the
accountants are unable to provide the investors with the precise data that is authentic to their
capital allotment decisions. The failure of the ethics that characterise fissures of fiduciary duties
by the individual who grant the accountabilities but could not accomplish them to behave in an
ethical manner.
1.4 Research Questions
The line of segmentation among the behaviour that is acceptable and the unethical
behaviour is not a bright one as various individuals observe it in various areas. There are few of
them that believe that individuals of a job in exchange for their income, independence and
prestige that are rendered to have accountabilities in order to look after their stakeholders, clients
and consumers without always being focused on their own incomes. Therefore, the research
questions that has been framed are:

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Q1. Is the primary responsibility of the auditor towards the corporate management as a client of
the investing public depend on the financial report?
Q2. Is there a requirement for vital transitions in the corporate governance and in the process of
accounting?

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Chapter 2: Literature Review
Trevino, & Nelson (2016) has reviewed that the management who oversees the reporting
corporations is of the interest disclosing in their favourable performance to the investors who are
vital to the sustaining contribution of the capital and overlook the fiduciary accountability to the
investors. The auditor who are independent are influenced heavily by the enterprise management
that they are unable to carry out their accountabilities to the user of the audited financial reports.
The close relationship among the management and the auditors must be reduced in the favour of
closer relationships among the investors and the auditors.
The next factor has been creative accounting explains about the account regulators that
have been swayed into manufacturing the regulations that are more favourable to the interest of
the preparers of the financial report. Campopiano, & De Massis (2015) has cited that two kinds
of distortion and manipulations that the authors make to transform the viewpoint of economic
practicality that have been shown in the financial reports of the parties who are interested.
The next source has been from Lozano, (2015) who have been able to explain on the fact
how the organizations have been able to influence the figures that have been disclosed in the
annual reports. During the years, the corporate creativity has led to the development of new style
of accounting. Therefore, the auditors requires to look for clarification and interpretation from
the Accounting Standard Board and undertake strict judgement.
Harjoto et al., (2015) has examined the factors that have been raised by the huge array of
the accounting standards and the technical rules that have been marked in the current history of
accounting. It has been debated that the profession of accounting is plagued by an incomplete
and inferior notion of the quality in their work which focuses on the compliance with the rules of

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processing rather than the correspondence with the commercial results that are essential to
construct the financial reports that are dependable guides for the individual activity.
Blowfield, & Murray (2014) has explained that the rising interest in the corporate social
responsibility. This has led to more precise conservation in the accounting of the organizations in
order to provide high quality financial data and even least inclined to undertake the unethical
practices like earnings management.
2.1 Usefulness of the earnings
Lodhia, (2015) has explained that the key intention of financial reporting is to supply the
lender and the investor with the data that provides the users the basis for selecting from the
substitute uses of resources that are scarce in nature. Conversely, despite the purpose of the
financial reports being clear, there are numerous ways with the help of which the authors of these
reports may construe the data that can be helpful. Earnings are often regarded to be the precise
element of the data that have been shown in the financial reports. Indeed, when the financial
researchers express their knowledge for the future results, they look largely to the income rather
than the other financial report elements like the sales, assets and equities (Young, & Thyil 2014).
Additionally, the manager’s compensation and hence many if the business decisions is reliant on
the objectives of earnings. The real assessment of the earnings effectiveness is a method that has
been undertaken plenty of time by various people. Conversely, even with the huge amount of
time spent on examining the topic, there is still not a single straightforward solution with respect
to the earnings optimization and its effectiveness. Such is the nature of the financial data, the
figures that may be helpful to certain users of the financial report that may be irrelevant for the
requirements of the other users.

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
When the examination of the earning effectiveness initially started, the underlying
principle was very simple: if various individuals looked to be making use of the similar
information to construct the financial statements and this fraction of information could be framed
as effective. In an examination of the earning usefulness concept, Fernandez-Feijoo et al., (2014)
has seen that stock price revision is related with the disclosure of the income report and would
thus give out answers that the data that has been shown in the income has been useful.
The model framed by Herzig, & Moon (2013) accomplished their goals by associating to
the market value of the firm with numerous aspects of accounting data and their estimated
realizations. This framework built off the general agreement that effective earnings numbers are
hugely accountable for the usefulness of the financial reports. Conversely, it even looked in to
the account that other common accounting data like the Book Value of Annual Returns and
Equity. Due to the success model, there is a vast expanding body of the research that investigates
similar issues by making use of the cross sectional regressions where the book value and the
earnings act as the primary variables that are independent in nature.
2.2 Explaining Corporate Social Responsibility and Sustainability
In order to understand any relationship among the usefulness of the financial reports of
the firm and their ethics, a working explanation of what is ethics in the corporate world has to be
explained first. Corporate Social Responsibility is a sort of ethics in the corporate world and is
explained as the functioning of a business on a sustainable, desirable and dependable basis that
looks after the ethical values, communities, environment and people. The essential features of
CSR are inclusive of the corporate governance, workplace practices, social impact and
environmental effect (ArAs, 2016).

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ETHICAL RESPONSIBILITIES OF FINANCIAL REPORTING OF A FIRM
Unfortunately, it is certainly advantageous to the community for corporations to perform
in a sustainable way it is not always in the best curiosity of the company to do so. Therefore, the
companies who choose the practice sustainability risk taking financial impacts as an outcome. A
debate has been made that the sole intention of a business entity is to optimise their profit for
their shareholders. In this argument, it has been implied that any resources undertaken in doing
anything outside of the maximisation of the profit is contradictory to the role of an economic
entity (Sierra‐García et al., 2015). There are some that go as far as to say that the managers who
incorporate CSR policies in order to increase their own political, social and the career agenda in
spite of undertaking a disservice to their stakeholders. There lies a key dilemma for the managers
as they must manipulate the demands of their stakeholders while restricting public scrutiny with
respect to sustainability in a rising environmentally aware community.
2.3 Sustainability Declarations in Accounting
The intention of accounting is to declare the valuable data about the firms in such a way
that any party that are concerned can garner some kind of value. Conversely, conventional
accounting often neglects to disclose the key data if it does not involve directly to the finances.
As the corporations have the social and the economic impacts the declaration of the social and
the economic data must be added in their company reports. By this notion, the company who do
elect to include a collection of the social impact declarations are giving out more precise
effective data than their rivals who select to reveal strictly the financial data.
A question arises that whether or not the addition of the sustainability declarations is any
parameter of the interest of the firm in giving out useful and comprehensive financial reports
(Shafer, 2015). A huge amount of past researches are existent on the associated topics even
though most of them make use of the financially dependent variables and therefore it is difficult

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to undertake a comparison of the results in order to attain a more definite answer. Indeed, certain
researchers have declared positive correlation among the financial performance and the corporate
social responsibility while the others have disclosed that negative correlation along with
everything in between.
2.4 Ethics and Creative Accoutring
It is generally gained that the intention of any financial entity is to turn into a profit. In
this understanding there is a logical truth that the management behaviour will often rotate around
the self-interest. It is this idea of self-interest that gives out the background for the idea of
earnings management (Dhaliwal et al., 2014). Earnings management is even known as creative
accounting, which is the practice of substituting the financial data in such a manner that abides
by the accounting standard rules and even does not abide to the purposed spirit of the laws.
Ethical issues in the accounting field is existent in many forms. In order to mitigate the unethical
actions, various solutions has to be constructed.