Financial Statements Must Tell the Truth

Article / Produced by TOW Project

A prime example of the role of truthtelling in the workplace is the preparation of financial statements by businesses, governments, churches, non-profit organizations, and individuals. All of these entities are required under certain conditions to prepare financial statements for the purpose of giving others an accurate depiction of their financial condition.

Often this requires disclosing information that is not favorable, including reduced profitability, diminished cash reserves, controversial levels of executive compensation, spiraling debt obligations and the like. Although organizations and individuals might prefer to hide such information, they have a legal and moral obligation to provide accurate information.

Most financial statements are crafted according to rules governing how to define, calculate, estimate and verify various aspects of the statements. Following these rules helps make financial statements accurate and comparable across different entities. But rules alone are not enough. Entities must make judgments about factors such as the likelihood of a contract being completed on time, the lifetime of equipment, the future interest rates, a wide variety of future risks, and a host of others. Leaders are often tempted to adjust their judgments about these factors in a way that paints the entity in the most favorable light—rather than giving the most accurate picture of its true financial position. In fact, some leaders may even believe they have a duty to “manage earnings”—to make profits appear stable from quarter to quarter—by making pessimistic adjustments during prosperous times and switching to optimistic adjustments during lean years.

The Bible, social expectations and laws and regulations in free and open countries prohibit such manipulations. The only acceptable criterion for financial statements is whether they “present fairly, in all material respects, an entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles."[1] That is, they must convey the truth. It is not enough that they follow the rules, or that they refrain from containing false statements. They have a higher duty, which is to convey an accurate picture of the true situation. This is the standard by which all of our statements should be judged. Do they give the listener or reader an accurate picture of the situation? If not, they are not telling the truth.

AU Section 411.01, Public Company Accounting Oversight Board, accessed on October 1, 2012 at