- Identified and analyzed 3 roles of ethics as it relates to judgment and decision making in accounting and financial reporting

Accounting is the means by which information about an enterprise is communicated and, thus, is sometimes called the language of business. Costs, prices, sales volume, profits, and return on investment are all accounting measurements. Accountants summarize this information in a balance sheet, income statement, and statement of cash flows. The statement of cash flows provides information about cash receipts and cash payments of an entity during a period. A secondary objective is to provide information about the operating investing and financing activities of the entity during the period. We know a great deal about the company that is valuable in assessing its future cash flows information that is useful to investors, creditors, management, and others. Because the balance sheet, income statement, and statement of cash flows are derived from the same underlying financial information, they are said to "articulate," meaning that they relate closely to each other.

Balance sheet tells about the assets and liabilities of business. It portrays the picture of the organization on a particular date. Income statement discloses the performance of the organization. It tells about the profitability of the organization.

Thus these are the important financial statements published by the corporations. Now a days investors and major lending institutions are wary because they don't trust the credibility of the accounting data. This is due to various accounting irregularities, which has happened recently.

Examples of Unsound financial reporting

The corporations should be aware of the long term issues rather than short term ones in business, even if it means forfeiting profits in the short run.

Take the case of World com which was involved in unsound financial reporting.
WorldCom Tuesday announced it will restate its financial results for 2001 and the first quarter of 2002 as a result of accounting irregularities and has terminated Chief Financial Officer Scott Sullivan. In June 2002, an internal audit discovered that US$3.8 billion had been 'miscounted.' The US Securities and Exchange Commission launched an investigation into these matters on June 26, 2002. (Wikipedia) On July 21 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history. Its founder and former CEO, Bernard Ebbers, came under fire for his failure to prevent the bankruptcy.
In August 2002, an additional $3.3 billion in improper accounting since 1999 was announced. By the end of 2003, it was estimated that the company's assets had been inflated by around $12 billion.

IMPACT ON THE CORPORATIONS
These scandals have reignited the debate over the relative merits of US GAAP, with its rules-based approach to accounting, versus International Accounting Standards and UK GAAP, which favour a principles-based approach. The Financial Accounting Standards Board has announced it intends to introduce more principles-based standards. More radical means of accounting reform have been proposed but so far have very little support.

In 2005, after a scandal on insurance and mutual funds the year before, AIG is under investigation for accounting fraud. The company already lost over 45 billion US dollars worth of market capitalisation because of the scandal. This was the fastest decrease since the WorldCom and Enron scandals. Investigations also discovered over a billion US dollars worth of errors in accounting transactions.

Thus these kinds of scams have made investors skeptical of the reporting by the corporations.

Ethical policies
Many companies have formulated internal policies pertaining to the ethical conduct of employees. These policies can be simple exhortations in broad, highly-generalized language (typically called a corporate ethics statement), or they can be more detailed policies, containing specific behavioral requirements (typically called corporate ethics codes). They are generally meant to identify the company's expectations of workers and to offer guidance on handling some of the more common ethical problems that might arise in the course of doing business. It is hoped that having such a policy will lead to greater ethical awareness, consistency in application, and the avoidance of ethical disasters.

An increasing number of companies also requires employees to attend seminars regarding business conduct, which often include discussion of the company's policies, specific case studies, and legal requirements. Some companies even require their employees to sign agreements stating that they will abide by the company's rules of conduct.

Thus role of ethics can be as follows:
1) To provide investor right kind of information
2) To make market more fair and efficient
3) To promote entrepreneurship and to boost the growth in economy