Ethical considerations in accounting decision-making (VCE Accounting Unit 4)
“Discussing and evaluating the ethical considerations in business decision-making, including the manipulation of profit by shifting revenues and expenses between reporting periods and the wider social and environmental responsibilities of a business”
Ethical accounting means recording transactions faithfully and in the correct period rather than manipulating results. Shifting revenue or expenses between reporting periods, such as recording next year's sales early or delaying an expense, breaches the accrual basis and faithful representation, misleads users, and can damage trust, reputation and the wider community. Ethical decisions weigh financial outcomes against social and environmental responsibilities.
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What this dot point is asking
VCAA wants you to discuss and evaluate ethical considerations in business decision-making, especially the manipulation of profit by shifting revenues and expenses between periods, and to consider a business's wider social and environmental responsibilities.
Ethics in accounting
Ethical considerations are the moral judgments about what is right and fair in a decision, going beyond what is merely legal or profitable. In accounting they include reporting honestly, in the correct period, and weighing the interests of the owner against those of employees, customers, suppliers, the community and the environment.
Accounting information is trusted by banks, the owner and other users to make decisions, so distorting it to look better is unethical even where it is not strictly illegal.
Manipulating profit by shifting periods
The most examined ethical breach is deliberately recording revenues or expenses in the wrong period to alter reported profit:
- Recording revenue before it is earned, or holding an invoice open past balance day, to inflate this year's profit.
- Delaying recognition of an incurred expense, or omitting a balance day adjustment such as accrued wages, to inflate this year's profit.
- Bringing expenses forward or pushing revenue back to reduce a profit, perhaps to lower tax or smooth results.
Shifting revenues and expenses breaches the accrual basis, which requires revenue when earned and expenses when incurred, and the period assumption, which requires each period to carry its own revenues and expenses. The result is not a faithful representation, so users are misled.
Worked example
The situation
At 30 June a business has incurred but not paid wages of 5,000 dollars and has not received the June electricity bill of 800 dollars. Reported profit before adjustments is 60,000 dollars. The owner is tempted to omit both balance day adjustments so the figures look stronger for a loan application.
Ethical (correct) treatment
Record Accrued Wages 5,000 and Accrued Electricity 800. Adjusted profit = 60,000 minus 5,000 minus 800 = 54,200 dollars. The Balance Sheet shows accrued liabilities of 5,800.
Unethical (manipulated) treatment
Omitting both adjustments leaves profit at 60,000, overstating it by 5,800, and understates liabilities by the same 5,800. Next period those costs are paid, depressing that period's profit instead.
Evaluation
The manipulation makes one period look 5,800 better at the expense of the next, misleads the bank into a lending decision based on false figures, and risks the owner's reputation and the relationship with the lender if discovered. The faithful, ethical profit is 54,200.
Social and environmental responsibility
Ethical decision-making extends beyond the reports. A business may face choices such as paying fair wages, sourcing inventory responsibly, managing waste, or being honest with customers, even where the ethical option costs more in the short term. Evaluating a decision means weighing the financial result against these wider responsibilities and the long term effect on reputation and stakeholder trust.
Why this matters
Discussion questions reward students who name the breached concept (accrual basis, faithful representation, period), explain who is misled and how, and weigh short term financial gain against longer term consequences. Ethics is examined alongside balance day adjustments, budgeting and report analysis.
Students equate ethical with legal. An action can be legal yet unethical, such as technically delaying an invoice to shift revenue, or pursuing profit while ignoring social and environmental impact. Evaluate the fairness to all stakeholders and the faithful representation of the reports, not just whether a rule was broken.
Exam-style questions
Questions in the style of VCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2021 VCAA-style5 marksThe owner of Ocean Cuttlefish wants the accountant to depreciate refrigeration equipment using a 15-year life, a $120 000 residual value and the straight-line method instead of reducing balance, saying it will make profit look much better so a potential buyer will be more interested. Discuss any ethical and accounting issues that the accountant should consider when determining the depreciation method, the estimates of useful life and the residual value for the equipment.Show worked answer →
A 5-mark discussion needs the accounting issue, the ethical issue, the effect on users, and a balanced judgement.
- Accounting
- estimates of useful life and residual value, and the choice of method, should reflect the expected pattern of economic benefits, not a desired profit. Choosing a longer life and higher residual purely to lower depreciation overstates profit and the asset's carrying value, breaching faithful representation (and relevance).
- Ethical
- the owner's motive is to mislead a prospective buyer, so the accountant should act with integrity and objectivity and not select estimates designed to manipulate reported profit.
- Effect on users
- the buyer relies on the reports and could overpay, and the accountant's professional reputation and legal position are at risk.
- Judgement
- the accountant should base the method and estimates on genuine, justifiable expectations of the equipment's use, not on the owner's preference.
2019 VCAA-style5 marksHealth900's owner wants a higher profit before selling the business and, without changing the business model, switches from FIFO to Identified Cost and deliberately stacks the lowest-priced items at the front so they are sold first, hoping to report higher profit and asset values. Discuss any ethical issues that the owner should consider. Refer to one qualitative characteristic that may be breached as a result of inventory being stacked in this way.Show worked answer →
Identify the manipulation, name a breached characteristic, weigh the effect on users, and reach a judgement.
- The manipulation
- selling the cheapest units first lowers Cost of Sales and leaves higher-cost items on hand, so both profit and closing inventory are inflated, even though nothing about the business has actually improved.
- Characteristic breached: faithful representation
- The reports no longer represent the real performance and position without bias, because the cost flow has been arranged to flatter the figures (relevance is also acceptable, as the inflated profit misleads decisions).
- Ethical issue
- the owner intends to deceive a prospective buyer into paying more, which lacks honesty and integrity, and the buyer who relies on the reports could be financially harmed.
- Judgement
- the practice is unethical because it deliberately distorts the reports for personal gain, even if the method change itself is technically allowed.