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The Importance of Transparency

By Daniel Butcher
September 1, 2022

New reporting standards and evolving technologies present a whole host of ethical issues for professionals to grapple with.

 

While new ethical issues and challenges for management accountants have cropped up in the current environment of rapid technological evolution, other issues, such as those related to financial reporting, have been around longer. For instance, as the profession moves toward principles-based accounting standards as opposed to rules-based standards, many experienced accountants are grappling with the complexity of the former, as they’re more comfortable with rules because deciding what was right and wrong seemed black-and-white. But whether you’re applying an ethical lens to reporting or to the use of new technologies such as data analytics and AI, it’s important to be transparent with stakeholders.

 

ETHICAL FINANCIAL REPORTING

 

In the current environment, there’s pressure on finance executives at both public and private companies for completing accurate U.S. Securities & Exchange Commission (SEC) and other reporting and earnings projections, legal and regulatory requirements, and tax compliance, as well as keeping all the various stakeholders happy. Principles-based approaches in areas such as fair value add elements of judgment and subjectivity, which creates opportunity to be second-guessed. And there’s risk that superiors wanting to meet targets and make the results look good exert pressure on those responsible for reporting and disclosure to make questionable or flat-out unethical decisions.

 

“When preparing financial reports, there’s a lot of wiggle room that the accounting standards provide, and how much you take advantage of that is a very pertinent ethical decision that financial executives need to make,” says Richard Daisley, vice president of accounting and finance reporting content at KnowFully Learning Group’s Surgent Accounting and Financial Education.

 

A related reporting area that raises ethical issues is the reporting of environmental, social, and governance (ESG) factors, including corporate social responsibility. This can also impact supply-chain and procurement challenges. There may be an ethical aspect to the questions: Where’s the company sourcing its materials from on the front end, and who’s it selling to on the back end?

 

“What were probably fairly straightforward decisions maybe in another era now, let’s face it, have political implications and ethical ramifications,” Daisley says. “There isn’t only the practical aspect of how to source what I need to keep my business open and the implications of keeping my workforce employed. Now it’s whose pockets is that money going into, and who’s going to be buying my products and what are they going to be using them for?”

 

In response to sustainability-disclosure guidance from the SEC, European Commission, and International Sustainability Standards Board, ESG reporting is taking on increasing prominence. Where are those goods being produced? If they’re being extracted, what are the methods that are being used, and what are the standards for paying and treating the suppliers’ personnel? Those are examples of ethical considerations related to the supply chain.

 

“Whether it’s the compliance side or if it’s operational considerations, scrutinize the impact of what we do, what our suppliers do, and what our customers do more broadly,” Daisley says. “We’re about to get one common set of reporting standards on the ESG side very shortly, so a lot of the excuses for not doing ESG reporting are falling away, and it’ll be very interesting to see the different approaches that companies take, especially those in certain industries that leave a bigger environmental footprint, once we start quantifying that impact in more detail.”

 

Consistency in reporting and disclosure is important to ensure an ethical process. Finance team members need to think through the alternatives, agree on an approach, come up with a position that the CFO thinks is reasonable, and apply it consistently. Sometimes it’s impossible to avoid uncertainty when faced with gray areas or tough decisions, but all professionals can do is try to home in on an estimate that’s in line with ethical standards and principles.

 

“If I’m trying to assess the reasonableness of someone’s position, the question I’m going to ask is, ‘You made this estimate or this judgment this year—how did that judgment pan out last year when you probably had to make a similar one, given similar circumstances?’” Daisley says. “That adds credence to either the effectiveness of the decision-making process or in some instances the lack of effectiveness indicating that there should be a higher level of skepticism that we need here, so there’s a multitiered approach that people can take with regard to getting to that number that’s reasonable.”

 

ETHICS OF CHANGING TECHNOLOGY

 

Another area where the concept of ethics comes into play is data privacy, protection, and use, which almost every company has to face. We have all this data, but who owns it, and how are we going to use it? What’s the company’s responsibility when it comes to data management and respecting clients’ or members’ confidentiality? For what uses do we need to get their consent?

 

Looking at AI and machine learning through an ethical lens, do employees and stakeholders really know what the algorithms are going to be spitting out? A lack of transparency tends to lead to a lack of trust. When the end user, customer, or investor can’t see how the black-box algorithms got to the outputs, the business has to address it, and finance professionals can play an important role in breaking down how the organization is using new technologies.

 

“If you can’t explain how technology, particularly AI and machine learning, is impacting the decision-making process, then the level of trust that needs to exist between your entity and its stakeholders, and thus the whole value proposition, is going to break down,” Daisley says. “Companies that have the best approaches to maintain and enhance trust between themselves and their stakeholders are the ones that are going to be best positioned to prosper in this era—the ones that don’t foster that trust are going to pay a price, so it’s something that people need to think about more strategically and holistically as the changes in technology bring these ethical issues to light.”

 

Daniel Butcher is the finance editor at IMA and staff liaison to IMA’s Committee on Ethics. You can reach him at daniel.butcher@imanet.org.
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