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ACCA Applied Knowledge · Business and Technology · Ethical conflicts and dilemmas

A company's finance team is under pressure to meet a bonus target and is considering reclassifying operating expenses as capital expenditure without justification. Which term best describes the ethical risk of the pressure to meet targets in this way?

This is earnings management, also described as manipulation of results or creative accounting. Reclassifying operating costs as capital items without justification inflates reported profit to hit bonus targets, which is unethical and misleading to users, unlike prudent accounting or a control such as segregation of duties.

  1. AEarnings management or manipulation of resultsCorrect
  2. BNormal prudent accounting
  3. CSegregation of duties
  4. DCorporate philanthropy

Explanation

Reclassifying expenses without justification to hit a bonus target is deliberate manipulation of reported results, often called earnings management or creative accounting. Prudence would tend to prevent overstating profit. Segregation of duties is an internal control, and philanthropy is unrelated.

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