Ethical Issues In Financial Reporting

Stakeholders in Financial Reporting

The stakeholders in this case are the employees( both the manager and the accountant), they are the primary stakeholders and have a hand in how the financial statements turn out to be.  The second stakeholder is the government. The government is involved in this case because it it provides a grant of $100,00 to the firm to encourage the hiring and training of mechanics  (Thomas and Ward, 2015).  The third stakeholder is the tax authorities, they will suffer if the profit is deferred to the next year as the manager suggests. Understating of profits will consequently lead to the company declaring and filing lower taxes than they ought to have filed. The tax authority thus is affected by the low profits declared. The other stakeholder is the mechanics who will be affected by the decision of the government not to give the $100,000 grant. This means that mechanics will not get the opportunity for training and eventually getting jobs in the company.  Lastly,  auditors are also a stakeholder in this case, they will be auditing misrepresented financial statements that will hinder them from effectively carrying out audit of the company  (Thomas and Ward, 2015).  All these are groups that are likely to be affected by a misrepresentation of the financial statement.  

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Why do you believe Freda asked Lucia to do this?

Fredas bonus is capped at $30,000 regardless of how much the company makes as profits. In this case, the managers bonus cannot go any higher and the company has made a profit of $3.5 million. The company cannot qualify for a government grant of $100,000 after making such high profits, and thus the Fredas advice to Lucia to find ways of deferring the profits is based on the idea that the government will not be providing any grant for the company.  If the accountant understates the profits to $3,000,000, Freda will get her maximum bonus of $30,000 and the company will still get the $100,000 grant. This is a win win situation for both the company and Freda, who will get a grant and a bonus respectively. Another reason that might have motivated Freda to advice Lucia to understate profits is so that the company cannot pay huge taxes to the government.

One of the ethical issues involved in this case is contemplating to report financial reporting fraudulent. The misstatement of financial statements by the management  by recording transaction that are not in line with generally accepted accounting standards is termed as fraudulent reporting . This is done to mislead various stakeholders and in this case the government. Greed in business has been the main factor that leads to fraudulent reporting (Weil, 2017). In finance and business world, the desire for making more profits leads to the management to cross ethical boundaries. An accountant should never let this desire get in the way of making sure that accounting standards and ethical guidelines are adhered to. The accountant ( Lucia ) faces the ethical dilemma  of being a whistle blower for what the management wants to do because she may not get the promotion and may lose her job. However, she is supposed to report any accounting violations to the Financial accounting standards board. Another ethical issue in this case is omission of financial records (Weil, 2017).  Omission is a violation of accounting ethics because the accountant leaves some information that may paint the business in bad light to the investors.

Reasons for Misrepresentation of Financial Statements

Can it be ethical to defer revenues and incur as many expenses as possible?

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By adjusting entries, Lucia can defer all possible expenses and accrue all possible incomes through adjusting entries (Barker, 2011). However, Lucia should not distort the financial position and performance of the entity  that is aimed at misleading stakeholders . Therefore, it is not ethical for Lucia to defer revenues and incur as many expenses as possible as this will mislead the stakeholders and is not in accordance with the general accepted accounting standards.

Trial balance










Trucking services


Personal expenses




Trucking services

Truck fuel



Case 1-Mr Trevor M Browne (formerly Newey) Queensland

This is a case that was heard on 4th August 2016 and the division was Queensland. The tribunal was the disciplinary tribunal and it found that Mr. Trevor M Browne breached article 39( a ) of the CPA code of conduct and the constitution. He was found to have been guilty of derogatory conduct and it was not in the best interest of members of CPA Australia between the years 2011 to 2013. He was found guilty of failing to properly supervise his practice Newey Accounting services by delegating his duties to un unqualified person who in turn violated the constitution by doing the following

  1. Misappropriating clients refunds
  2. Unauthorized withdrawals from the trust account of Newey accounting services.
  3. Lodging returns under his registration tax agencies

The unqualified person had misused excess of $40000 from the clients account.

Costs and penalties

Due to Mr. Browne failure to attend the disciplinary hearrings, the tribunal found and imposed the following penalties and cost

  • His membership was forfeited
  • He will not be eligible for any readmission to the profession until 4 august 2024
  • He was imposed a fine of $ 10000 by the disciplinary committee
  • It was agreed by the tribunal that for him to be eligible for readmission he should first complete the CPA membership program as a non –member and to pay all costs that were due by the CPA.
  • He was ordered to pay a sum total of $1,417.54 cost.
  • Case 3

On February 8th 2017, the disciplinary committee found Shiv Prakash in breach of articles 38a and 39a of the constitution and was expelled by the mortgage and finance association. He was also convicted by the crimes act in with the intention to defraud. He was banned by the association from engaging in any credit activities.

Penalties and costs

He was to forfeit the membership and was not eligible for readmission for thirty years. He must pay in full all the outstanding fees, subscriptions and membership costs. If he wishes to be readmitted he must complete in full the CPA program again(Thomas and Ward, 2015). He was also given a severe reprimand and a fine of $1000, for not responding to professional conduct(Barker, 2011).. He was ordered to pay the Australia CPA a cost of $752.27.

Case 3- Mr Christopher J Baldwin (Victoria)

The disciplinary committee found Mr. Christopher to have breached article 39 a(1) of the constitution .  this was on 24 May 2017, he was found guilty of violating four counts in section 8c of the 1953 Tax administration act. He had failed to lodge his income tax returns for the years 2011 to 2014.

Ethical Issues Involved in Financial Reporting

He was imposed the following penalties;

  1. He was given a severe reprimand on each of the complaint that had been sustained
  2. Forfeiture of membership for that reason
  3. He must successfully complete quality review by the complaint at his own cost by end of year 2017 or forfeit his membership.

The cost imposed by the Australian CPA was $ 633.34.

Q 2. APES 110 Standards

Responsibility: is to fulfill the commitments acquired in a way satisfactory for all, this principle is missing if half of these commitments are met.

Confidentiality: It is necessary to have professional reserve and not to be counting “things” that are not interested to anybody but the really interested ones.

Observations of the normative dispositions: It is necessary to comply with the norms that promulgate the State and its ministries, it is necessary to comply what dictates the Technical Advice of the Accounting, it is necessary to comply even what the user says as long as this does not violate the laws and good manners(Thomas and Ward, 2015).

General Rules Of Ethics

In the professional exercise, the Public Accountant will act with probity and good faith, maintaining the honor, dignity and professional capacity, observing the highest ethical rules in all his acts(Barker, 2011).. No Public Accountant may take or support to modify the status of the accounting or make public statements against the Institution. The Public Accountant who is a member of other institutions will refrain from intervening directly and indirectly in acts that are harmful to the profession of Public Accountant.

The Public Accountant must not carry out activities that are incompatible with the exercise of the profession. The Ethics Committee shall inform the Directing Council of the compatibility or incompatibility referred to in this standard. 

The Public Accountant is obliged to keep professional secrecy and not to disclose for any reason the facts, data or circumstances of which he has knowledge in the exercise of his profession, except for the information that the legal provisions require(Thomas and Ward, 2015).

No Public Accountant may benefit by making use of the information obtained in the exercise of the profession, nor may it communicate that information to other persons with intentions that they use in the same way. . No Public Accountant may take or support to modify the status of the accounting or make public statements against the Institution.

The Public Accountant may consult or exchange views with other colleagues on matters of criteria or doctrine, but shall never provide data identifying the persons or businesses in question, unless it is with the consent of the interested parties(Thomas and Ward, 2015).
The Public Accountant must keep in mind that his professional performance leads to decisions that have repercussions towards third parties, so when issuing his opinions he must do them regardless of criteria.

Q 3. Sufficiency of Penalties and Costs

The Australian tribunal on discipline is the most punitive body in this case. A reprimand is issued in most of these cases depending on the level of breach of the conduct. Most of this people have been stripped of their memberships and others demoted from the prestigious FCPA to CPA(Thomas and Ward, 2015). Many more have been instructed to undertake the course again and diven a ban before they are registered again.


Barker, R. (2011). Short introduction to accounting. Cambridge: Cambridge University Press.

Thomas, A. and Ward, A. (2015). Introduction to financial accounting. London: McGraw-Hill Education.

Weil, R. (2017). Financial accounting. [Place of publication not identified]: Cengage Learning.