Running Head: BUSINESS ETHICS MINI-RESEARCH PAPER 1

BUSINESS ETHICS MINI-RESEARCH PAPER

Mamdouh Alshammari

Iowa Community College

 
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Business Ethics

Ethics is a crucial factor in creating an appropriate business environment free from

discrimination, customer exploitation, bribery, and has proper corporate management. Business

ethics provide policies that guide the business operations of a company. Ethics approach tries to

create the bases of trust between the customers and business firms as well as fair competition

between the firms. Business ethics not only control the external factors of accompany but also

internal elements of a company. Motivations of the stakeholders and financial recording should

adhere to the ethical policies to create a productive business environment.

Motives of the stakeholders in the markets

 There exist various motives of stakeholders, which can affect an organization progress

both negatively and positively. Stakeholders' motivation approaches vary from one stakeholder

to another. This motivation can be bringing of social change, gaining of materialistic wealthy,

creation of social power, safety and security among many other motivations of the employees. A

company should be able to identify the motives of its stakeholders create a fair decision-making

system which favours all the stakeholders.  Incentives can be unethical if they are not used to

meet the good and desired targets in business (Liu, Wright & Wu, 2015). Also, the relationship

between pay and motivation can boost the stakeholders to be unethical. Most firms think that use

of performance-related payment can trigger intrinsic motivation among the employees. This

approach can encourage dishonesty behavior among employees. This approach also promotes

increase risk-taking among the employees.

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How financial information can be unethically skewed to improve the company's stock

price      

Manipulation of the financial records is among the most common behaviors experienced

by companies. Although companies have taken steps to counter this challenge of corporate

malfeasance, the issue still becomes investable.

Various accounting techniques can be easily used by companies to influence financial

information. Some of these techniques include; premature revenue records which can be

questionable. This manipulation can be done through; recording revenue before shipping the

product, recording revenue before finishing all the services and recording income that cannot be

purchased (Rashid, et al., 2018). The second technique is moving current cost to a later or earlier

time through several ways such as changing accounting standards to bring about manipulation,

failing to write off damaged assets, wiping out values in a gradual way and acquiring standard

operating costs with an aim to cut off on expenditure by moving them from the income statement

to the balance sheet.

A third technique is through recording non-existing revenue through methods which

consist of recording investment income as earnings, recording earnings for sales that were not

executed and taking note of proceeds obtained through the loan as revenue. The fourth and last

way is through accelerating earnings with one-time profits in ways such as increasing profits by

categorizing gains and investment income as revenue and also by accelerating gains by the sale

of assets and taking note of the cash received as earnings.

Also shifting of future planned expenses to the current time creates a void for financial

records manipulation. This is by altering of accounting set standards to create manipulation

opportunities through provisions of amortization, depreciation and depletion.  Most of the

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manipulation approaches pertain the altering of the income statements. Other techniques are used

to manipulate the balance sheets and cash flows.

Impact of misrepresenting financial information       

The approach of misinterpretation of financial information focuses on how the

examination of items than can affect the business affairs in an entity, gone through by an auditor

based on the records presented. These misinterpretations have consequences on the progress of a

company.

Inaccuracies in financial data can have numerous consequences. These consequences

include; the credibility built between the company, the board of directors and investors will be

distorted. For instance, if you deal with a business that is a non-profit organization, you may

miss out on large donations and other capital grants. In terms of decision making, you will end

up making inappropriate decisions that will affect your tracking of expenses, income, and gains.

In terms of benefits, the company may be undervalued when reports show that the profits earned

are meager and it may also be overvalued when reports indicate that the profits earned are very

high (Rashid, et al., 2018).

An organization may end up taking huge loans to cover up for the unrealized revenues to

prevent stakeholders from suspecting the financial reports probably because taxes affect the

stakeholders' dividends. This inconvenience will impact the operations of the organization

because it will have to come up with practical ways to repay the loan otherwise will be risking its

ability to continue surviving in the market.

Financial misinterpretation threatens both the financial position of the company and the

reputation of a firm. Skewing of the financial statements may be seen as a little problem which

widens throughout the company in a spiral way. These cases may be hard to detect.
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Impact of misrepresenting financial information on the efficient markets hypothesis

Efficient Market Hypothesis (EMH) implies that security prices showcase data in a faster

way and without bias (Lo, 2017). There exist three types of EMH which vary depending on the

already available information sets. Weak form efficiency is the first one, which implies that

current stock prices showcase the data in past prices fully. Therefore, the knowledge that a share

of IBM sold for $16 in the previous month cannot predict the stock return of tomorrow.

However, financial data, such as current period earnings could be used to produce abnormal

returns (Rashid et al., 2018). The semi-strong form is the second version, and it assumes that

prices showcase all the available data that is available in the general public.

 In such a scenario, prices need to showcase earnings when it is announced to the public

for the first time. Therefore, making use of information earnings a week after the announcement

should not bear abnormal returns. However, if an individual gains access to the earnings number

before it is presented to the general public, then there are higher chances of abnormal returns

occurring when the inside information is used. The active form is the last version, and it implies

that all the available information that is held both publicly and privately is assumed to be

indicated in prices without bias and in a faster way.

Considering of factors such as capitalization, float, and bid-asked spread will be crucial

in determining of a market security. Also, they help in considering any chances of market

inefficiency. Misinformation of the market price will therefore impact the progress of new

investors.

 
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Reference

Liu, X. K., Wright, A. M., & Wu, Y. J. (2015). Managers' dishonest fraudulent financial

reporting: The effect of control strength and control framing. Journal of Business Ethics,

129(2), 295-310.

Lo, A. W. (2017). Efficient markets hypothesis. The New Palgrave Dictionary of Economics, 1-

17.

Mahlendorf, M. D., Matějka, M., & Weber, J. (2017). Determinants of financial managers'

willingness to engage in unethical pro-organizational behaviour. Journal of Management

Accounting Research, 30(2), 81-104.

Rashid, N., Asfthanorhan, A., Johari, R. J., Hamid, N. A., Yazid, A. S., Salleh, F., & Salleh, F.

(2018). Ethics and Financial Reporting Assurance. International Journal of Academic

Research in Business and Social Sciences, 8(11), 1346-1355.