Question

Was your answer well developed 3-5 Paragraphs in length. Did you answer with reflection and with examples given in class and text book. Do you have Spelling and punctuation errors on the assignment Textbook needed : Essentials of Entrepreneurship and Small Business Management (7th Edition) Question : Describe in your own words how do ethics affect the financial results of a company?

Answer 1

Ethics plays a major role in the functioning of a company. It is part of the company's brand building and a more ethical company is more likely to be perceived as a better company. For example: across the world companies are expected to spend a certain proportion of their revenue to help the society and its problems with a certain expenditure called corporate social responsibility (CSR). Firms which spend more on CSR are seen as more responsible firms and are given a much higher corporate governance rating by regulators and credit rating agencies. Increasingly CSR is seen as part of a firm's corporate governance solutions and hence this plays a significant part in their brand building process.

World over, with more and more focus on sustainability over utilization of resources, ethics plays an even more significant part in a firm's results. Firms which do not adhere to environmental norms and other regulatory requirements are less likely to be granted contracts and deals which could affect their financial results. Also, firms which flout norms after grant of contracts are likely to be fined and sued and hence these payouts not only increases their legal costs, but it also makes them look like bad firms in the eyes of investors.

Also, in terms of financial reporting, accounting standards gives you certain leeways for amount of window dressing which could be done for firms to make their financial statements look attractive. However, too much of window dressing could lead to major accounting scandals such as Enron Scandal. In the case of Enron scandal, we also saw how the auditing firm played a role in the scandal (Arthur Andersen) was dissolved. While, we are looking at an extreme case of how one of the biggest accounting scandals lead to the bankruptcy of big firms, even for smaller firms reputation matters the most and that is how a firm can attract more deals. Hence, ethics plays a major role in a firm's financial results.  

A firm could be extremely ethical, however a few shady scandals at the top could lead to arrests, loss of credibility and a major bankruptcy overall. Hence, more stringent corporate governance will always ensure that firms are more ethical and hence their reputation and financial results does not suffer a dent.