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Ethical Dilemmas in Business Interactions

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Ethical Dilemmas in Business Interactions

        This memo will focus on ethical dilemmas faced by company managers. In today’s business environment, managers can use their account discretion to manipulate earnings for personal reasons, as most companies allocate bonuses on a performance-based approach. Since executive compensation is tied to achieving certain performance targets, manager’s main goal is to consistently achieve performance targets. If a company misses its financial targets, management bonuses can be reduced or cut and their job performance can be impacted. Furthermore, a company’s stakeholders are also impacted when an organization faces an ethical dilemma, such as earnings manipulation. As stockholders, investors’ credibility of a company’s financial reporting would be impacted by a change in the company’s earnings.

        Managing earnings within the boundaries of a given accounting standards is not illegal, but it is unethical. Managers should ask themselves various questions when confronting an ethical dilemma such as this. Questions that managers should ask themselves should be as follows: “Is it legal? “Is it ethical?”; “Who are the stakeholders?” ; “What are the short- and long-term consequences?”; “Is my decision in line with my company’s core values? My personal core values?” Ethical questions would help managers to firstly realize if their actions are either illegal or ethical. Secondly, managers need to verify if their actions are in line with both the company’s and their personal core values. Core values are the ethical guidelines that set the standard on how managers run their companies and how they approach and value their own personal ethics. Thirdly, managers should evaluate their actions’ impact on the stakeholders involved and their expectations for the company. Finally, managers should analyze the short- and long-term consequences associated with their actions and the overall impact of their decisions.

        IFRS being principal-based would affect financial ratio comparison involving American and EU companies. The main distinction between principles and rules based accounting standards is based on the amount of implementation guidance. American and European managers would differ in their likelihood of engaging into earnings management, as IFRS includes much less implementation guidance than U.S. GAAP. IFRS generally does not contain strict rules that determine the accounting treatment for specific transactions, leading to greater opportunities for earnings management. A principal based approach could impact financial ratios as its lack of rules may provide increased earnings management opportunities. Therefore, as the flexibility of accounting standards increases the possibility that earnings management could occur, the credibility of management’s reporting would decrease.

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