The premise and expectation of valid, complete, reported, financial information is not something to take for granted. Our system of regulation and supervision has evolved over a century. The process might be described as reactionary, as investors and the public have learned to exploit weaknesses as well as the system succumbing to economic pressures exposing weaknesses. As advanced and controlled as our financial markets have become, the underlying component to its successful continuation is the ethics and moral character of its participants. A system of financial reporting has evolved so that all participants in the financial markets can rely on a degree of information accuracy and continuity. “Organization members are not omniscient. Errors in judgements can and do arise in the normal course of organizational activities” (Bean, 2001, p.66). Even though there are safeguards and procedures, it is the expectation that individuals oversee, certify and guarantee information. Ethical behavior underscores a healthy, dynamic market system.
Requirement for Reliable Information
There is a necessity for reliable information that represents a comprehensive picture of a public company at a given point in time. This uniform information is the foundation for the different sectors that comprise the financial markets to function. Reporting guidelines, regulations and laws have been constructed to guide the information flow in the markets so that the information utilized by investor, bankers and business managers is accurate and representative of the business. The financial markets are comprised of transactions between equity and debt companies, mortgages, foreign exchanges, and derivative investments. Regulated information “promotes the efficient use of resources, encourages innovation, and provides a liquid market for buying and selling securities and for obtaining and granting credit” (Revsine et al., 2018). Faith in accurate representation is crucial for our market to thrive. If investors of equity and debt cannot rely on presented financial information, then the entire system becomes less stable.
The Scope of Information Use
The financial markets are quite incredibly and intricately connected. I say incredibly in reference to our ability to take a situation, a tendency or probability and turn it into an investment that becomes marketable. The financial markets can be thought of as an ecosystem. The elements are all connected. The main element of this interconnected marketplace that makes it valuable is that the financial information has an understood degree of certainty. This certainty is that the financial information presented by companies adheres to a standard of integrity, reliability in its value and a uniformity that can be translated to other like and even unlike companies. This basal requirement of standardized, accurately represented information allows for speculation, investment, financing, and hedging. Shareholders can rely on reports concerning their invested equity of a company, prospective shareholders can rely on represented earnings, financial analysts can market and rely on accurate financial statement filings, employees and managers can be assured of the value of their company and their sweat equity, debt lenders, and suppliers can rely of the measured ability of a company to repay new debt and speculators can become educated and involved knowing that accuracy is demanded by supervising agencies through regulation and oversight.
Our free, capitalistic markets have their strength as a result of truth in reporting. The ability and opportunity that exists for anyone to participate in these markets also allows for those that might take advantage of misinformation, less than truthful representations that would be at the detriment of others. A good example if this is in the regulations governing insider trading. The unfair manipulation of market instruments due to limited, information that has not been disseminated to the public at large creates advantages for some while creating losses for others. The regulation of financial markets is only one side if the proverbial coin, “Lawyers, accountants, investment bankers, industry specialists and strategic consultants must reaffirm existing best practices and commit themselves to higher and more inquisitive standards of due diligence conduct” (Sherman, 2011 pp. 66-67). GAAP and IFRS are standards that govern financial reporting with the goal of standardizing financial reporting. GAAP (generally Accepted Accounting Principles) is required of U.S. domestic companies while IFRS (International Financial Reporting Standards) is used by most foreign companies. It is also the ethical responsibilities of the individual that define this system. Licensing, accreditation, and fiduciary responsibility help ensure ongoing reliable and ethical behavior. Even though the goal may be to create, fund, sell, purchase, finance and hedge within the system, an ethical perspective of each individual is assumed. The challenge to this ethical stance is the allure of wealth. There are few enticements such as money and treasure that tempt each individual. We can also look for Biblical reference in guiding our actions, how we should approach others, what we should give of ourselves and through these examples strive to live a good ethical life in all our endeavors. “Learn to do well; seek judgement, relieve the oppressed, judge the fatherless, plead for the widow” (Isaiah 1:17-19).
Resultant financial system
Financial Markets are intricately interwoven and reliant on accurate, scheduled, complete, and contextual information. Regulations guide companies in the presentation and handling of financial information. Professionals in the form of accountants, managers, and auditors disseminate information so that investors, shareholders, and finance entities can market, trade, and speculate on the performance of public companies. This ecosystem of activity relies on predictable accuracy.
Bean, D. (2001). Equivocal Reporting: Ethical Communication Issues. Journal of Business Ethics, 29(1/2), 65-76. Retrieved July 5, 2020, from http://www.jstor.org/stable/25074440
Revsine, L., Collins, D., Johnson, B., & Mittelstaedt, F., (2018). Financial Reporting and Analysis. (p.2). New York: NY: McGraw-Hill Education
Sherman, A. (2011). Due Diligence. In Mergers and Acquisitions from A to Z (pp. 65-100). New York; Atlanta; Brussels; Chicago; Mexico City; San Francisco; Shanghai; Tokyo; Toronto; Washington, D.C.: AMACOM Division of American Management Association International. Retrieved July 5, 2020, from http://www.jstor.org/stable/j.ctt1d2qzxj.9