Manipulating the numbers.

“Finance is an information business. Indeed it already spends a higher share of its revenues on information technology then any other. It seems ripe for disruption by information technologies.” (The Irish Times)

The past 15 years have seen some of the largest cases of financial reporting scandals, showing failed ethical judgment by senior and middle managers. Some of the most shocking were Enron’s misstated earning using illegal accounting schemes and financial vehicles provided by Meryl Lynch and Bristol-Myers Squibb misstating revenues and stock value inflation. Although information systems didn’t mastermind these instances, they were instrumental in these frauds. Financial information systems were used to bury their actions from public scrutiny to avoid being caught. (Laudon, Kenneth & Jane (2011))

Not only is there a possibility of hacking into a financial information system, the manipulation of financial data and reporting is also a major ethical issue. Since levels of inventory, sales and revenue figures are all recorded on a system, manipulation has never been easier. One of the largest issue was the that financial analysts didn’t understand the complex reporting transactions undertaken. Secondly, incentive systems didn’t motivate analysts to include and bad information that may upset the company. The lack of training in financial systems prevented analysts and audits from identifying issues. (Laudon, Kenneth & Jane (2011))

“parts of the financial sector today . . . demonstrate the lowest ethical standards of any legal industry” John Kay. (Wolf, Martin (2016))

In order to solve these issues, Sarbanes-Oxly implemented a number of regulations. Services such as financial information system design and implementation in external audit outsourcing was prohibited. This will hopefully help identify fraudulent activity that is being carried out in a company. However, realistically if people are already carrying out unethical behaviors what makes Sarbanes thing they’ll abide by these rules? (U.S. Securities and Exchange Commission, (2003))

Essentially, information systems are at the root of the current problem and are what is making financial fraud easier to carry out. However, information systems may also be the solution. New technology may transform payments and financial transactions. One possibility being real time settlement via distributed ledgers. The advantage is an improvement in record-keeping. The records will be kept on a database that is shared across networks that would hold identical copes. There will be no option to change and edit data. (Wolf, Martin (2016))

A question now arises, if these financial reporting systems limit the actions of current accountants, if something goes wrong or fraudulent behavior becomes apparent should the corporate accounts be to blame of the lack of regulation built into these systems? The dividing line between acceptable and unethical behavior can be quite blurred when it comes to accounting standards. (Staubus, George (2005)) Financial managers are so strongly rendered to create favorable reports. So the ethics compromises are found in the performance of academic accountants so if their responsibilities are reduced and put into a system will this issue be solved?

Then we have the issue of the audits. We could implement a financial reporting system to track all transactions. These reports will then be audited by audits whose primary responsibility is to the corporate mangers. So should this relationship be loosened so that the primary responsibility of audits be to the investor? (Staubus, George (2005))

Personally, I think the regulation and prevention in prevention fraud is a distant possibility. Storing financial records automatically on a database system will be a step forward but whenever human behavior comes into play unethical actions are always going to be apparent. Will the auditors analyze these reports ethically? Will these systems be built ethically?  There will always be room for unethical behavior so are we wasting are time carrying out extensive measures to prevent it? Is there always a way around the laws and legislation?

We’ll let you decide.

Until next time,

Ned
References

 

Staubus, George (2005), “ Ethics Failures in Corporate Financial Reporting” , Journel of Business Ethics 57:5-15, Springer 2005.

Wolf, Martin (2016), “Banking would benefit from a good dose of disruption”, The Irish Times, [online] Available at: http://www.irishtimes.com/business/economy/banking-would-benefit-from-a-good-dose-of-disruption-1.2566097 [Accessed 1 Apr. 2016].

U.S. Securities and Exchange Commision(2003), “Strenthening the Commision’s Requirements Regarding Auditor Independence”, Available at: https://www.sec.gov/rules/final/33-8183.htm

[Accessed last 1 Apr 2016].

Laudon, Kenneth & Jane (2011), “ Managing Information Systems: Managing the Digital Firm”, Ch.4, pp. 127-128, Pearson Hall 12th Edition.

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