Ethics concerning FASB

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It is widely acknowledged that ethics is neither a modern concept nor a new area of research. It is a concept that is synonymous with the professional code of ethics in either region. The relationship between employer and employee, the relationship between employees themselves, and, most importantly, the ethical relationship between the company and the larger community are all governed by ethics. It specifies the appropriate modes of interaction in order to prevent conflicts of interest and to provide the required security for both the community and the environment. Ethical enforcement is critical to ensuring public confidence in economics and accounting. In this light, the Financial Accounting Standard Board (FASB) which is a private organization is mandated to provide acceptable accounting principles (GAAP) for the sake of the public’s interest within the United States of America. Despite the FASB’s intervention in providing the basic guidelines accounting professional, families and personal interests are an obstacle to achieving the ethical standards as stipulated.

Significance of the Report on Toshiba Accounting Scandal

Despite having specific and definite ethical standards the business fraternity still experience challenges in their performances. Due to individual interests, companies have ended making wrong decisions that have resulted in negative impacts. One such company is Toshiba in 2005 whereby it misrepresented its financial position leading to private investors investing in the wrong business. The implication was that the company was sued to return the invested amounts and the accrued damages that had resulted from the investment. The company faced a serious crisis because of the investors pulling out. Its image was damaged resulting to other investors to rethink their decision to invest in the enterprise. Thus, this report is critical as it will explore the implication of unethical performances in accounting and its implication to the society and the business. Furthermore, from the case of Toshiba, it will offer a suitable recommendation to the company, and any other company can borrow the recommendation to enhance its performance.

Report on Toshiba Accounting Scandal

According to Gowthorpe financial statements are used to provide necessary insights used by interested parties to assess the performance of the manager and to make economic decisions (3). Family and personal interest come in when the accounting office is directly influenced by the implication of the decision made from the records of the progress of the organization. The case of Toshiba one of the leading tech companies is a good example of how personal interests can hinder accountability and integrity. Toshiba admitted o have overstated it's earning with more than $ 2 billion which is almost four times higher than its original estimates in April 2015 (Mathews and Gandel, “Fortune”). The company CEO, who later resigned, pressured the accounting officers to overestimate the company’s performance to attract more investments. This indicates that personal interests can be a hindrance to accounting ethics. On the part of the employees they had a chance to refuse being coerced into unethical practices but owing to their personal interests of the job, they failed to report the anomalies. This makes them accountable to ethical malpractices.

In 2016, a group foreign investors sued Toshiba in Tokyo court for over $ 162.3 million dollars in damages over its accounting lies (Reuters, “Fortune International”). The investors were seeking compensation after the company had lied about its financial position resulting to them making poor investment decisions. Its accounting officers had given wrong information after being pressured by the management, thus, luring people to invest in the company. As part of public interest such as those of the investors, FASB provides the standards to be followed to avoid any conflicts of interest. However, Toshiba failed to follow such standards and misguided the private investors into investing into a company that could not return their investments on time and perhaps make profits as anticipated.

As a result of unethical performance by the accounting officers-though under pressure- from the top officials, Toshiba’s reputation was tainted. The implication is that the company lost potential investors who would probably have invested in its original position before the lies surfaced. Furthermore, when the brand was tainted the potentials of losing clients were very high mainly because some clients prefer operating with companies with very high reputation.

Owing to unethical economics practices, Toshiba is still overcoming the barriers that resulted from its damaged reputation. Its shares prices dropped significantly owing to a single financial misrepresentation. The corporate cultures in which the employees were not able to question the management facilitated the wrong doings that resulted in worse conditions for the company. The company CEO was forced to resign because of malpractices that were guided by personal interests of proving he was a good leader. In the end, he ended making up worse blunders than the anticipated positive impacts for the company. Thus, Toshiba’s unethical performances were guided by personal interests and lack of transparency and ended up creating chaos for the company and far worse loss of financial investors which translated to financial losses.

Discussion

The accounting standards imposed by the FASB and United States Securities are intended at standardize accounting practices and to protect the public by shaping the working ethics of the accounting professions. However, private institutions are not obliged to follow the standards but are recommended to comply with them. In the case of Toshiba, it is a privately held company thus; it was not obliged to follow the standards. Furthermore, there was no external auditing that was being conducted on the company which facilitated to its unethical performance. The investors who invested their money based on the lies made by the firm felt the pinch of failing to get the returns from their investment. This led to the suspicion that the company had lied about its financial position leading them to invest in the unworthy company. As a result, the investors sued the firm for lying. Furthermore, they requested compensation for their money and further interests because of the company’s lies.

Spiceland argues that changes in standards can have significant impacts on a firm, interested groups, creditors, and investors (36). Ideally, this statement implies that ethical decisions presently made can influence the firm’s future performance and its relation to different crucial players. This is represented in the case of Toshiba through the role of investors’ withdraw from the company and their action to sue the organization. The company lost much in the legal process not forgetting that it had to repay the foreign investors all their investments and additional profits for damages caused. Furthermore, the company had created a negative publicity which influences the future decisions of investors and the potential clients.

Senaratne notes that it is essential for accounting professionals to maintain high standards of ethics as expected by the accounting board (“CIMA”). The nature of the profession puts them in a great position because members of the public put trust on them. Before people can invest in an organization, they must see its potential of returning their investment or rather risk losing their finances in unviable business plans. Thus, this very nature of ethics in accounting is very sensitive to public, and it creates the link between the members of the public and the organization. Toshiba’s accounting officers failed to live to the expectations of the members of the public. In the end, the trust was broken between the company and the public. As a matter of fact, the company lost the current investors and the potential ones. Furthermore, its reputation was put in jeopardy just because of the poor organization cultures that put the accounting officers at a position that they would not have questioned the authorities.

The inappropriate accounting practices in Toshiba varied from pushing back losses, booking future profits, and pushing back charges. These actions were not necessarily misappropriation of funds rather poor representation of facts as expected. The technique resulted in banks and other private investors to believe that the company was performing well and they anticipated future growth which never happened. In this light, it became clear that Toshiba in different units of its operations had lied about its position. The investors’ felts cheated into investing in the wrong company especially because it could not offer the anticipated returns in time. Furthermore, the company was not making profits as it had earlier indicated. From these malpractices, the company had to endure the repercussions investors’ decision.

Recommendations

Form the above noted ethical challenges; the report recommends that the company should change its working cultures. The Toshiba’s working environment and cultures restrained the accounting officers from airing their views on the matter. When the officers were requested to economically misrepresent the company’s position they had no choice but to accept the decision of the senior authority. The impact was sinking of the company through withdrawal of the investor and demands to compensate for the damages accrued from the shoddy investment.

The report further recommends that the auditing professions should be taken through a series of training to instill high ethics of performance. This report believes that despite the pressure from the senior management, the auditing officers had a role to do the right thing. In this case, refuse to play by the rules despite the fact that they faced termination of their services. As highly accountable persons in the society, the accounting officers should not let any circumstance be a reason to compromise their credibility. In fact, that single act of accepting the pressure to misrepresent the company puts the officers at higher risk of failing to secure any other jobs especially at the public institutions because they accepted to be compromised.

Furthermore, the report recommends that private institutions should be subjected to FASB standards for the sake of the welfare of the public. Despite the private institutions having freedom to perform their own accountings and having to set their private ethics standards, some of the companies have failed to live to expected standards. Therefore, the best way to solve the issues once and for all is through subjecting the companies to the basic standards as laid down by the FASB. Furthermore, this will create a high level of trust between the private companies and the members of the public.

Conclusively, the FASB instills a high level of ethical standards among the business fraternity. Through these standards, the public is protected from making wrong decisions based on the unethical performance of the companies. Furthermore, relationships in organizations are maintained with high levels of professionalism being instilled. As the report has indicated, ethical malpractices in Toshiba ended up in the firm losing its investors and profits. Furthermore, a bad reputation was created due to poor economics standards that ended up in misrepresentation of the company. Thus, companies should adapt the high level of ethical practices as stipulated by the FASB.

Works Cited

Gowthorpe, Catherine. Creative accounting: some ethical issues of macro- and micromanipulation. Oxford Brookes University. Journal of Economic Literature classification. Print.

Matthews, Chris, and Stephen Gandel. "The 5 Biggest Corporate Scandals of 2015." Fortune.com. Fortune, 27 Dec. 2015. Web. 29 Apr. 2017.

Reuters. "Foreign Investors Sue Toshiba over Accounting Scandal." Toshiba Sued over Accounting Scandal By Foreign Investors | Fortune.com. Fortune, 13 Oct. 2016. Web. 29 Apr. 2017. .

Senaratne, Samanthi. "The role of ethics in accounting." CIMA - Chartered Institute of Management Accountants. N.p., July 2011. Web. 29 Apr. 2017. .

Spiceland, J D. Intermediate Accounting. Boston: McGraw-Hill/Irwin, 2009. Print.

October 25, 2022
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