Ethical Dilemmas in Financial Reporting: Where Should Companies Draw the Line Between Compliance, Transparency, and Strategic Disclosure?

Mbonigaba Celestin; Anjay Kumar Mishra

Authors

Mbonigaba Celestin President, Brainae University, United States of America
Anjay Kumar Mishra Visiting Faculty and Management Consultant,

Keywords:

Financial Reporting, Ethical Dilemmas, Transparency, Strategic Disclosure, Investor Trust

Abstract

Purpose
This study investigates the ethical dilemmas in financial reporting, focusing on the interplay between compliance, transparency, and strategic disclosure. It aims to identify trends in financial misrepresentation and their impact on investor trust.

Design/Methodology/Approach
A mixed-methods approach was employed, combining case studies, regression analysis, and chi-square tests to examine the dynamics of financial reporting ethics. The study analyzed data from 2020 to 2024 to assess changes in financial misrepresentation and selective disclosure practices.

Findings

Financial Misrepresentation: The study found a significant increase in financial misrepresentation from 30% in 2020 to 45% in 2024, while selective disclosure rose from 25% to 40%.
Transparency and Investor Trust: Regression analysis revealed a strong correlation (R² = 0.99) between financial transparency and investor trust, indicating that ethical reporting enhances corporate credibility.
Strategic Disclosure vs. Transparency: Statistical models showed that strategic disclosure, rather than full transparency, has a stronger impact on investor confidence, highlighting the complexity of balancing ethical reporting with strategic communication.

Originality/Value
This research contributes to understanding the ethical challenges in financial reporting and the impact of transparency on investor trust. It provides empirical evidence supporting the need for enhanced regulatory frameworks and technological solutions to mitigate unethical reporting practices.

Practical Implications

Regulatory Enhancements: Strengthen regulatory frameworks to prevent financial misrepresentation and ensure compliance.
AI-Driven Auditing: Implement AI-driven auditing systems to improve the accuracy and reliability of financial reports.
Corporate Governance: Enhance corporate governance structures to promote ethical financial communication and maintain investor trust.

Conclusion
The study concludes that ethical financial reporting is crucial for maintaining corporate credibility and investor confidence. It recommends a balanced approach between compliance, transparency, and strategic disclosure, supported by robust regulatory and technological measures.

References

Bebbington, J., Larrinaga, C., & Moneva, J. M. (2008). Corporate social reporting and reputation risk management. Accounting, Auditing & Accountability Journal, 21(3), 337-361. https://doi.org/10.1108/09513570810863932

Beyer, A., Guttman, I., & Marinovic, I. (2023). Financial reporting discretion and market efficiency: An ethical perspective. Accounting Review, 98(2), 341-369.

Brown, P., & Tarca, A. (2021). IFRS adoption and financial transparency: A global analysis. Journal of Accounting Research, 59(1), 123-157.

Brown, T., & Taylor, K. (2024). Stakeholder pressure and financial disclosure: The role of institutional investors in Canada. Journal of Corporate Finance, 59(3), 112-130.

Christensen, H. B., Hail, L., & Leuz, C. (2023). Mandatory disclosure and corporate transparency: Lessons from global regulations. Review of Accounting Studies, 28(3), 567-599.

Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: A review and assessment. Journal of Management, 37(1), 39-67. https://doi.org/10.1177/0149206310388419

Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1), 20-47. https://doi.org/10.5465/amr.1997.9707180258

Deegan, C. (2002). The legitimising effect of social and environmental disclosures–A theoretical foundation. Accounting, Auditing & Accountability Journal, 15(3), 282-311. https://doi.org/10.1108/09513570210435852

DeGeorge, F., Ding, Y., & Stolowy, H. (2022). Earnings management: Incentives, regulations, and ethical implications. European Accounting Review, 31(4), 789-814.

DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147-160. https://doi.org/10.2307/2095101

Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65-91. https://doi.org/10.5465/amr.1995.9503271992

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Cambridge University Press. https://doi.org/10.1017/CBO9781139192675

Freeman, R. E., Harrison, J. S., & Zyglidopoulos, S. (2020). Stakeholder theory: Concepts and strategies. Cambridge University Press.

Gassen, J. (2021). Strategic financial reporting and the role of ethical leadership. Journal of Business Ethics, 164(2), 345-367.

Greenwood, R., Hinings, C. R., & Whetten, D. (2017). Rethinking institutions and organizations. Journal of Management Studies, 54(7), 1201-1223. https://doi.org/10.1111/joms.12391

Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1-3), 405-440. https://doi.org/10.1016/S0165-4101(01)00018-0

Healy, P. M., & Serafeim, G. (2023). The ethics of financial reporting: Theory and evidence. Harvard Business Review, 101(5), 123-139.

Hernandez, J., & Gomez, R. (2021). AI-generated financial reports: Ethical concerns and transparency. Mexican Journal of Accounting and Finance, 12(1), 45-68.

Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2), 235-256. https://doi.org/10.2307/3857812

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X

Johnson, M., & Becker, P. (2021). IFRS, GAAP, and strategic financial disclosures: A U.S. case study. Journal of Financial Ethics, 14(3), 201-223.

Kumar, V., & Li, X. (2022). Ethical trade-offs in financial reporting: Insights from Chinese manufacturers. Asian Journal of Accounting and Ethics, 19(2), 89-112.

Lee, Y., & Park, H. (2022). Corporate culture and financial disclosure ethics in South Korea. International Journal of Accounting and Business Ethics, 33(4), 312-329.

Leuz, C., & Wysocki, P. (2022). The limits of financial reporting regulation: Evidence from cross-border disclosure. Accounting Horizons, 36(1), 1-25.

Madsen, J., & Yeung, E. (2024). Artificial intelligence in accounting: Challenges and ethical considerations. AI & Society, 39(1), 45-68.

Martinez, F., & Silva, G. (2022). Whistleblowing and financial reporting ethics in Brazil. Latin American Journal of Accounting Research, 20(1), 55-78.

Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340-363. https://doi.org/10.1086/226550

O’Donnell, P., & Thomas, S. (2021). Corporate governance and the role of disclosure in the post-pandemic era. Business Ethics Quarterly, 31(1), 59-81.

Ogunleye, J., & Adeyemi, T. (2023). Regulatory enforcement and financial reporting ethics in Nigeria. African Journal of Finance and Compliance, 7(2), 211-240.

Ross, S. A. (1977). The determination of financial structure: The incentive-signaling approach. The Bell Journal of Economics, 8(1), 23-40. https://doi.org/10.2307/3003485

Roychowdhury, S., Shroff, N., & Verdi, R. S. (2022). The role of earnings management in corporate finance decisions. Journal of Financial Economics, 146(2), 323-351.

Scott, W. R. (2008). Institutions and organizations: Ideas and interests. Sage Publications.

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x

Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355-374. https://doi.org/10.2307/1882010

A. K. Mishra, & P. S. Aithal. (2023). Relationship between Demographic Characteristic and Ethical Capital. In Future Trends in Information, Communication and Computing Technology (pp. 47–56). Srinivas Publication. https://doi.org/10.5281/zenodo.8422544

Mishra, A. K., & Aithal, P. S., (2023). Building Ethical Capital through Human Resource.International Journal of Management, Technology, and Social Sciences (IJMTS), 8(1), 1-15. DOI: https://doi.org/10.5281/zenodo.7519862

Mishra. A.K., (2022). A Reference Book on Comparative Assessment from the Eastern Approach. Zenodo. https://doi.org/10.5281/zenodo.7113124

Mishra,A.K., & Jha.P.B., (2023). Emergence of Quality Assurance and Accreditation—Context of Higher Education in Nepal.PP. 167-182. Emergence and Research in Interdisciplinary Management and Information Technology. Edited by P.K. Paul et al. Published by New Delhi Publishers, New Delhi, India. ISBN: 978-81-19006-34-2. Zenodo. https://doi.org/10.5281/zenodo.8065756.

Anjay Kumar Mishra, Dinesh Gupta, & Aithal, P. S. (2020). Factors Identification and Conformance of Quality of Cement and Coarse Aggregate used at Gautama Buddha Airport Upgrading Component, Nepal. International Journal of Management, Technology, and Social Sciences (IJMTS), 5(2), 187-200. DOI: http://doi.org/10.5281/zenodo.4065739

Ethical Dilemmas in Financial Reporting: Where Should Companies Draw the Line Between Compliance, Transparency, and Strategic Disclosure?

Authors

Keywords:

Abstract

References

Published

How to Cite

Issue

Section

Most read articles by the same author(s)