Question

Accounting statements can be manipulated. Each week I will have an ethical issue for you to consider. Please try to give an argument pro and con on each ethical issue. Any actual public examples you would like to cite would be most appreciated by all. Balance sheets are from a fixed point in time. Therefore, it is possible to do “window dressing” on the last day of the fiscal year. This could include bringing in long term debt as cash to improve short-term financial liquidity and then repaying the loan the next day. This could include selling an asset for cash on the last day of the fiscal year and repurchasing the next day. The possibilities are endless. Further, the financial statements do accurately reflect the financial position of the corporation for the day in question. Nevertheless, is this ethical? What is the distinction between unethical and illegal?

Answer 1

Let us understand the difference between illegal and unethical.

Illegal activities are prohibited by law of the country. Since, it is opposed by law it is not legal or illegal.

Whereas, unethical activity may or may not be prohibited by law but these activities are not morally right. Since, it is morally wrong thing to do we say they are not ethical or unethical.

Example: Kidnaping someone is illegal as per law. At the same time it is unethical as it is morally wrong as well.

Not helping a blind to cross the road may be treated as unethical (as morally we expect public to help them) but it is definitely not illegal.

Now, apply same concept in accounting. There is no law in place to say that doing transactions (Window dressing) on the last day of the fiscal year is not legal (illegal). However, it is not morally right to do such adjustment just to show glamorous picture of business to mislead shareholders of the company. Thus, window dressing is definitely unethical.

Note: If any major transactions take place on the last day of financial year due to genuine reason, then it is not window dressing and it is ethical.