Posted: October 29th, 2022

W5OMM622Res2 – In spite of the presence of regulatory bodies

PART 1:

In spite of the presence of regulatory bodies like the SEC, it’s important to acknowledge that there isn’t a universal “organization police.” An aspect that became apparent during my tenure as an administrator in a public organization is the limited scrutiny that organizational leaders often face. The onus falls on these leaders to uphold the best interests of their organizations, which is a primary justification for their substantial compensation. However, it’s essential to recognize that these executives are still human beings susceptible to biases like fear, anger, envy, and even avarice. This insight is crucial in comprehending how things can veer off course.

The primary objective of any business is profitability. Executives bear the responsibility of devising strategies that ensure the well-being and financial success of their companies. While several organizational concepts are abstract in nature (e.g., motivation, leadership), financial reporting is expected to be concrete and transparent. Yet, as discussed earlier this week, it remains feasible to manipulate reality by presenting irrelevant or omitted data. A case in point is the Enron scandal, where financial managers manipulated financial records to portray a rosier picture of the company’s performance than the actual reality (Epstein, 2014). Under the weight of the demand for triumph, business and financial managers might resort to concocting misleading financial reports, deceiving anyone who may be observing.

Historical instances repeatedly demonstrate that misleading people is plausible even in the presence of regulatory oversight. As mentioned previously, this underscores the significance of ethical principles guiding all leaders within an organization. Though accurate financial reporting should be straightforward, the responsibility lies with the individuals wielding the pen and calculator to act ethically.

PART 2:

The principles underpinning Generally Accepted Accounting Principles (GAAP) are formulated by the Financial Accounting Standards Board (FASB). All publicly traded companies are mandated to adhere to these principles (Epstein, 2014). It’s noteworthy that companies not only compete domestically but also on an international stage. Members of both FASB and the International Accounting Standards Board (IASB) are actively working towards harmonizing GAAP rules with international financial reporting standards. However, potential conflicts of interest might arise if these members hold stakes in or invest in companies impacted by this convergence. Stakeholders seek investment at minimal cost, while creditors aim to set interest rates that effectively match risk.

This convergence initiative has been underway for several years. Could the delays be strategically motivated to offer investors or creditors a competitive edge? While investors might find this advantageous, creditors might find themselves at a disadvantage. The mere possibility of such an occurrence, coupled with the authority vested in these members, warrants concern. Both domestic and international competitors will need to adjust to new unified regulations. They will no longer be able to manipulate asset valuation to bolster their bottom line. For most organizations, profitability remains the ultimate objective. However, it’s essential to acknowledge that business loopholes exist, and organizational leaders are inclined to exploit them when possible. Once this convergence is formalized, it becomes imperative for the Securities and Exchange Commission (SEC) to diligently monitor activities and conduct periodic audits to ensure GAAP compliance across all parties. Drawing lessons from audit outcomes, prioritizing continuous enhancements in the financial reporting process should be paramount.

Reference:

Epstein, L. (2014). Financial Decision-Making: An Introduction to Financial Reports. Bridgepoint Education, Inc.

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