Discussion On The Balance Sheet Dilemma

Discussion The Balance Sheet Dilemmajoseph Intriago Posted Jul 23 20

Discuss the ethical implications of including or excluding a financial liability on a company's balance sheet, considering utilitarian ethics and virtue ethics principles. Explain which approach would be more ethical and justify your reasoning with appropriate ethical theories and their relevance to financial reporting practices.

Paper For Above instruction

In the realm of financial reporting, ethical considerations surrounding the treatment of financial liabilities on a company's balance sheet are of paramount importance. Balancing transparency, accuracy, and ethical integrity requires an understanding of various ethical frameworks, notably utilitarian ethics and virtue ethics. These frameworks offer distinct perspectives on how companies should approach accounting practices, especially regarding the inclusion or exclusion of liabilities, which can significantly impact stakeholders' perceptions and decision-making.

Utilitarian ethics emphasizes the outcomes of decisions, advocating for actions that maximize overall happiness or benefit. From this perspective, the primary concern is the consequence of including or excluding liabilities. If including a financial liability on the balance sheet results in a more truthful representation of the company's financial position, it promotes informed decision-making by investors, creditors, and other stakeholders, ultimately leading to greater market efficiency and trust. Conversely, excluding liabilities to present a more favorable financial picture might temporarily benefit shareholders through an inflated stock price but can lead to long-term harm if the truth emerges, undermining stakeholder trust and causing broader economic damage. This aligns with the consequentialist view that honesty and transparency tend to produce the best overall outcomes, especially when considering market stability and investor confidence (Quinton, 2016).

Virtue ethics, on the other hand, centers on the character and moral virtues of the decision-maker. It advocates for actions rooted in honesty, integrity, sincerity, and fairness. Applying virtue ethics to financial reporting suggests that companies should prioritize virtues such as truthfulness and trustworthiness. Including all recognized liabilities demonstrates honesty and a commitment to fidelity with stakeholders, which fosters a culture of integrity within the organization. Such ethical behavior establishes a reputation for reliability, which can be beneficial in the long term, even if it results in perceived short-term disadvantages like lower reported profits or stock prices. Virtue ethics emphasizes moral character over merely the consequences or rules, urging corporate entities to act as virtuous agents consistently (Aristotle, 2009).

In practical terms, the ethical approach that aligns with both frameworks advocates for the inclusion of financial liabilities on the balance sheet. While this might present a more conservative and less favorable snapshot of the company's financial health in the short term, it ultimately supports ethical transparency, stakeholder trust, and long-term sustainability. Accurate reflection of liabilities ensures that investors and other stakeholders make informed decisions, reducing the risk of deception and financial scandal. Moreover, acting ethically in these reporting practices builds a corporate culture grounded in integrity, which is vital for reputation management and adherence to regulatory standards.

In conclusion, while utilitarian ethics might initially seem to justify excluding liabilities if it results in favorable outcomes, the long-term benefits of full disclosure better serve the interests of all stakeholders. Emphasizing virtues such as honesty and trustworthiness further reinforces the moral obligation of companies to maintain transparency and integrity. Therefore, the ethically justifiable approach is to include financial liabilities on the balance sheet, aligning with both consequentialist and virtue ethics principles to promote responsible and ethical financial reporting.

References

• Aristotle. (2009). Nicomachean Ethics. Oxford: Oxford University Press.
• Quinton, A. (2016). Utilitarian ethics. La Salle, IL: Open Court.
• Blumberg, M. (2010). Ethical dilemmas in financial reporting. Journal of Business Ethics, 91(2), 247-259.
• Gray, S., & Malik, A. (2018). Corporate social responsibility and ethical accounting: A moral perspective. Accounting, Auditing & Accountability Journal, 31(5), 1290-1312.
• Kant, I. (1785). Groundwork of the Metaphysics of Morals. Cambridge University Press.
• Schwartz, M. S. (2017). Corporate ethics and financial transparency. Financial Ethics Review, 12(3), 34-45.
• Sen, A. (1999). Development as Freedom. Alfred A. Knopf.
• Waddock, S. (2004). Creating an ethical organizational culture. California Management Review, 47(3), 19-35.
• Trevino, L. K., & Nelson, K. A. (2017). Managing Business Ethics. Pearson.
• Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman.