Earnings Management (EM) is the term used to describe the process of manipulating earnings of the firm to meet management’s predetermined target. The flexibility of accounting standards may cause some variability in earnings to occur as a result of the accounting choices made by management. However, earnings management that falls outside the generally accepted accounting choice boundaries is clearly unethical. The intent behind the earnings management also contributes to the questionable ethics of the practice. Some managers use EM as a means of deceiving shareholders or other stakeholders of the organization, such as creating the appearance of higher earnings to increase compensation or to avoid default on a debt covenant. The intent to use EM to deceive stakeholders implies that it can be unethical, even if the earnings management remains within the boundaries of GAAP or IAS. Earnings management has been defined as management’s exploitation of accounting flexibility to meet Continue reading
Business Ethics
Case Study on Corporate Governance: WorldCom Scandal
Established in 1988, WorldCom was formed so that the strongest, most capable public relations firms could serve national and international clients, while retaining flexibility and client- service focus inherent in independent agencies. Through WorldCom, clients have on demand access to in-depth communication expertise from professionals who understand the language, culture and customs in the geographic areas of operation. WorldCom has 105 offices in 90 cities and 40 countries on five continents, more than 2000 employees and recorded revenue of US $ 243.5 million in 2008. In the 90’s WorldCom was involved in acquisitions and purchased over 60 firms. The complete financial integration of the acquired company must be accomplished, including an accounting of assets, debts, and a host of other financially important factors. WorldCom moved into Internet Traffic, controlling 50% of US Internet Traffic and 50% of the e-mails worldwide. In 1997, WorldCom and MCI completed a US $37 billion Continue reading
Audit Committee – Meaning, History, Roles, and Responsibilities
Corporate governance plays an important role in disciplining the management of the company like transparency in financial reporting and having robust internal controls. Enormous responsibilities like audit committee, duty of the auditors and induction of non-executive directors to act independently have been inflicted on the management of the company and any deviations will be viewed seriously and action against directors can be initiated by the compliance authorities. Audit committee, which is a group of directors who are not concerned with day-today management of the company but supervising how business is administered, conducted and reported. A committee of directors which is entrusted with the precise duty to evaluate the yearly financial reports of the business is known as the audit committee. An audit committee acts as a link between the board of directors and the auditor which includes the evaluation of the statutory audit report, the suggestion of the auditors, the Continue reading
Consumerism – Meaning and Effects
Consumerism refers to the process by which individuals acquire new goods and services without making some important considerations. Some of these considerations that the consumers do not mind are their need for the product and the durability of the product. They also do not mind the effects of the manufacture and disposal of the product to the environment. Companies spend huge sums of money to advertise their products so as to create a desire for the product by the consumers. The advertisements convince the consumers that the products are very important and that it is very beneficial for them to acquire the products. Those who acquire the products are convinced that they have made an achievement. Consumerism leads to materialism where consumers are preoccupied with the acquisition of material objects, comforts and considerations and have no concern on the spiritual, intellectual, and cultural values. Consumerism has many effects on the Continue reading
Moral Hazards in Workplaces
In the economic literature nowadays, moral hazard is studied in various fields. There are two major categories of researches on moral hazard. One is originated from the early literature about insurance market; the other is about economic decision-making, such as finance, banking, accounting and management. In the recent financial crisis, moral hazard is more frequently discussed and blamed as one of the causes of the banking problem. What is Moral Hazard? Moral hazard is defined in various ways in different aspects. The earliest explanation is from the perspective of insurance sector. Marshall provided the definition as ‘any misallocation of resources which results when risks are insured with normal insurance contracts and only with such contracts’. Briefly, moral hazard as the risky behavior an insured individual may act because of the insurance cover. There are two kinds of moral hazard in insurance field. One of them is ex ante moral hazard, Continue reading
Socially Responsible Investment (SRI)
Socially responsible investment (SRI) can be defined broadly as an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. SRI funds aim to integrate personal, social and environmental concerns with financial considerations, their objective is to increase investors’ wealth while ensuring that the selected companies have a positive impact on people and the Planet. Often called ethical investments or sustainable investments, this type of investment has become increasingly popular in recent years. The early stages of the SRI movement can be traced back to the nineteenth century, especially amongst religious movements such as the Quakers and Methodists. Specifically, these groups excluded investments that would go against their beliefs. Such non-financial ‘exclusionary’ behavior in investment choice became a highlight in 1960s during the Vietnam War, where funds like the PAX World Fund was set up with a mission Continue reading