Misleading Forecasts in Accounting Estimates: An Ethical Blind Spot?

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