Misleading Forecasts in Accounting Estimates: An Ethical Blind Spot?

Posted: 10 Mar 2013

See all articles by Wally Smieliauskas

Wally Smieliauskas

University of Toronto - Rotman School of Management

Kathryn Bewley

Ryerson University - Ted Rogers School of Management

Ulfert Gronewold

University of Potsdam

Ulrich Menzefricke

University of Toronto - Rotman School of Management

Date Written: January 15, 2013

Abstract

The current reporting environment with its increasing use of accounting estimates, including fair value estimates, suggests that unethical accounting estimates may be a growing problem. This paper provides explanations and empirical evidence for why some types of accounting estimates in financial reporting may represent ethical blind spots. These types of ethical blind spots in can have an escalating effect that corrupts not only an individual or organization but also the accounting profession and the public interest it serves. Ethical blind spots in financial reporting are thus a factor in the ‘tone at the top’ that has taken on new urgency as a result of the recent acquittal of former Nortel executives on fraud charges related to accounting manipulations. The Nortel verdict is viewed by many as legitimizing accounting gamesmanship in Canada’s capital markets. The social consequences for users of financial statements can be huge. This decision illustrates that the courts may not be the best place to deal with ethical reporting issues. The courts may be relied for only the most egregious unethical conduct and, even then, the accounting profession is ill equipped to assist the legal system in prosecuting accounting fraud. We argue that the problem of unethical reporting should be addressed by the accounting profession itself, preferably as a key part of a conceptual framework in ethical financial reporting.

Keywords: unethical financial reporting, ethical blind spots, forecasts in accounting estimates, accounting risk

Suggested Citation

Smieliauskas, Wally and Bewley, Kathryn and Gronewold, Ulfert and Menzefricke, Ulrich, Misleading Forecasts in Accounting Estimates: An Ethical Blind Spot? (January 15, 2013). Rotman School of Management Working Paper No. 2230692, Available at SSRN: https://ssrn.com/abstract=2230692

Wally Smieliauskas (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kathryn Bewley

Ryerson University - Ted Rogers School of Management ( email )

Toronto, Ontario
Canada
416 979 5000 x2487 (Phone)

Ulfert Gronewold

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany
+49 331 977 3804 (Phone)
+49 331 977 3331 (Fax)

HOME PAGE: http://www.uni-potsdam.de/u/rwwp

Ulrich Menzefricke

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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