INTRODUCTION
The accounting profession is very important to society. The society uses information such as reported profit to criticize how a corporation performs its functions. This is commonly done by the news media. According to Carroll (2010), the news media can help to build a corporation’s image or even ruin it.
The main objective of the essay is to find out why reported profit is commonly used to criticize corporations and how the news media uses it for that purpose.To achieve this, several articles will be reviewed and analyzed to give a clear picture of how reported profit is used and thereafter a conclusion of the analysis will be given.
LITERATURE REVIEW
Degradation of corporate profits
According to Desai (2005) firms are known to overstate their profits in order to gain favor in the capital markets and at the same time they understate them when reporting to the tax authorities. It is of major concern of how companies are able to concurrently overstate and understate reported profits. Desai points out these companies prepare financial statements for both purposes. Financial statements reflecting book profits are submitted to the capital markets to attract potential investors while those reflecting tax profits are submitted to tax authorities in an effort to avoid paying taxes.
These practices have been associated with big companies such as Enron. Up to 1997, Enron was a fast rising company dealing in the production and sale of natural gas. Later on it was discovered that the company was producing financial statements that were not transparent enough to the users of such information. The financial statements showed rising tax losses and rising book profits. This was intended to mislead investors and the analysts of these financial statements, and also to avoid payment of taxes.Other companies known to have followed the same trend are Xerox and Tyco.
Tyco had its own method of aggressively avoiding taxes for the benefit of management without taking the interests of the shareholders into consideration. Tyco concealed its income from foreign sources in order to avoid paying taxes from foreign investments. In an attempt to avoid paying taxes, it shifted its income before tax from the U.S to jurisdictions that paid lower taxes and also engaged itself in a network of intercompany loans to shift profits from one jurisdiction to another.
Xerox on the other hand, restated its previous profits to show that they had met the targets for 2002. It isdifficult to compare Xerox’ desire to manipulate earnings with tax avoidance,however keen investigation into their financial statements showed that they had reduced their effective tax rate over the years to understate the taxes they were paying.
The fact that such big companies were involved in such scandals is evidence that companies’ trend of providing unreliable corporate profits is rapidly increasing. It has also been noted that the tax system in the U.S is confidential one and the tax returns do not give the companies’ investors a clear picture of the corporations’ profitability.
Corporations and corporate social responsibility
Many corporations give more value to business profits as compared to people and the environment (Neimark and Kleinberg 1995). This poses a major concern to the public of whether companies are aware of their footprints from a social perspective and from an environmental perspective.
For a company to be considered socially responsible it has to regard corporate social responsibility as an inevitable part of its profit planning exercise. The company, Stride Rite, is one company which is notable in its dedication to the corporate social responsibility association. It has won awards for being considerate towards its society’s needs and doing what the society desires. Over the years, the company is known to allocate over 4% of its reported profits before tax to its charitable foundation; it offered scholarships to youths who needed them, donated 100,000 pairs of shoes, and established a daycare and a facility for the elderly, among others.
Stride Rite acknowledges that it has to balance its profit making needs for the benefit of its shareholders as well as its obligation to society. If it is not able to make profits then it is likely to have too little or nothing to offer the society. Therefore for them it is a two way situation that they should aim to make profits in order to give back to society and also for society to help them in achieving their profit goals by providing a never ending demand for its products.
Acting socially responsible is likely to make a corporation to have a stronger customer base; it is from the society within which a corporation operates that it gains customers for the goods and services that they produce. Even though a considerable amount of money might be expended on such responsibilities, in the long run, the corporation is likely to gain goodwill from society and this in turn will lead to its long term profitability.
Many companies have realized the importance of choosing business ethics through being socially responsible as this helps them avoid scandals in the industry in which they operate and because they believe that it is the society that shapes any corporation and its work. They have therefore engaged in making strong policies in ethics to ensure that everyone working for them is aware of what is expected of them when it comes to practicing business ethics.
There are times when businesses are faced with a dilemma on whether to choose ethics over their own reason for existence that is the business they do and their need to make profits. Neimark and Kleinberg give an example of a company selling infant formula and breastfeeding mothers. For the business to make profits, it has to convince breastfeeding mothers that their product is far much better than breast milk contrary to what the society deems right. If this corporation claims to be acting ethically then it has chose ethics over their profit making motive. This is because society will assess it through those grounds.
Environmental groups and corporations
There is increasing need for corporations and environmental groups to have a common goal that is to take care of the environment. However it is commonly known that most corporations and environmental groups do not get along. This because, environmental groups will always stress upon corporations being accountable for the negative impact they have on society, the businesses on the other hand are wary about the effect of environmental costs on their reported profits (Rothenberg and Becker 2004).
Even though it is not mandatory, companies are expected to give a report on the environment detailing what they have done in conserving the environment. Corporations have to show that they are meeting their needs without compromising those of the future generations. To do this they have to detail their environmental costs and measures. This means that part of their profits have to be set aside for the purpose of repairing damage done on the environment.
Rothenberg and Becker In their study found out that smaller firms have not adopted environmental friendly technologies as their bigger counterparts. It is believed bigger corporations have the most negative impact on the environment but the percentage of the pollution that smaller corporations emit to the environment is not so insignificant to be ignored.
Most environmental groups find that companies do not take interest in allocating some of their profits to environmental conservation programs and most of them do realize their effect but they choose to ignore because they are more concerned with the level of profits they report and choosing to adopt environment friendly practices means a decrease in the amount of reported profit.
The media and multinational corporations
Multinationals have been known to cause conflicts in regions where they operate. In a bid to maximize profits, multinationals take advantage of regions which provide cheap labor and which offer cheap production facilities. The laws regulating the operations of multinationals have been said to be less strict and thereby giving them too much freedom to operate in whichever area they please. This has prompted the media to criticize their operations in order to make the government take more action to regulate their operations (Bennett 2002).
The human rights activists are also in a move to ensure that multinationals do not take advantage of the cheap labor to use children as slaves and they do not abuse human rights. Those who specialize in conflict resolution also are also offering their expertise to ensure that conflicts are identified before they get out of hand.
Bennett notes that the attack on the world trade center is one of the consequences of operating internationally without regard for social justice. This is because corporations are neither practicing more economic inclusion nor are they promoting social justice in their international operations.
It is important that the government provides more laws in international operations and they should at the same time pay more attention on the views of the media on the operations of multinationals. The media has been known to identify areas where multinationals are not acting according to the required laws through the many researches that the media do in their everyday lives.
ANALYSIS OF WHY AND HOW THE NEWS MEDIA USES REPORTED PROFITS TO CRITICIZE CORPORATIONS
Degradation of corporate profits
The news media through analysis of the manipulated financial statements of Enron played an important role in making the public aware of the claims aboutthe corrupt Bush administration. Many reports revealed that the chairman of that company at the time of its collapse, Mr. Lay did many fundraising for President Bush both as a governor and during his presidential campaigns. If it had not been through the keen interest of the media, the public would not have been aware of the relationship between Bush and Enron. There are also reports linking President Clinton to the Enron. According to media reportsPresident Clinton’s administration had favored Enron in many ways in return for large donations.
Similarly the news media also used reported profit figures of Xerox and Tyco to make shareholders and the public aware of the practices of the two companies in evading taxes. Many reports detailed how they had used their reported profits to maintain their image while in the real sense they were experiencing financial problems.
It is evident that the three companies failed in meeting their shareholders needs even though their attempts to manipulate profit figures were intended to impress them.
Companies are expected to report profits that reflect the true status of their profitability. Attempts to conceal the true nature of profits in Enron caused a great uproar where the media was actively involved in trying to unmask Enron’s unethical practices. By doing this, the media intended to make known to the public and to potential investors that even though Enron was giving a good picture in terms of profitability, it was doomed to fail with its system of giving different profit figures to the tax authorities and to capital markets.
It had avoided paying a considerable amount of taxes, it had huge amounts of losses and debts to pay and if the investors got a clear picture of the status of the company they would divest their investment in the company. The media helped to reveal to the public that Enron was not complying with its legal obligation of paying taxes and it was not meeting up to its responsibility to its shareholders.
Corporations and corporate social responsibility
It is not amazing to find the news media criticizing corporations for choosing to maximize on their profit making ability rather than diverting some of their attention to their social and environmental footprints .When a company chooses to act in ways that do not show concern for society, for instance emitting high levels of carbon emissions to the air, the society through the media is likely to criticize such companies.
Some companies believe that choosing to act responsibly at the expense of shareholders is depriving them of their right of wealth maximization. It is however important to note that when companies practice corporate social responsibility, they are establishing a respectable and firm ground in the society in which they operate in. The society appreciates corporations which go to great lengths to ensure that they are not negatively impacting the people and the environment.
By use of reported profits, the media has enabled the public to see which organizations are acting in a socially responsible way. Stride Rite was praised for its ability to show good profit figures and at the same time for its ability to give back to society in so many ways.
Some companies such as Levi Strauss have been criticized for not being able to contribute significantly even if their financial statements showed that they were making adequate profits to enable them engage actively in corporate social responsibility.
According to the news media, when a company does not contribute to society in a philanthropic way they are only giving a bad image to their society. No corporation can exist on its own, through corporate social responsibility; they can make a significant impact enough tolure customers and hence increase profits. Corporations should not act in ways that benefit them only but they should also consider what they do that might be harmful to its people.
It is also through the news media that companies are able to be ranked on their efforts to be socially responsible. Companies ranking high are known to receive awards for their efforts to help the society they relate with. Such rankings have been known to boost their reputation and making them achieve a good name among their peers and society at large.
Environmental groups and corporations
It is common to see the media advertising on environmental pollution, most of this pollution is from large corporations which do nothing to reduce the amount of damage they do to the environment. When the media joins forces with the environmental groups to sensitize corporations in their environmental foot print, they only do this because they care about their environment.
It is not logical for corporations to commit themselves to activities such as mining and quarrying and then leave such places not restored to their original form. Such activities are known to give corporations very big profit figures and it is only fair that such sites be restored to their original conditions. When left unattended to, the mines and quarries have been known to cause loss of lives and there is no use for corporations to report high profits when their image is being ruined due to their negligence.
Most corporations especially those that deal with manufacturing are known to produce high levels of carbon emissions. Corporations are being encouraged to reduce the level of carbon emissions through use of facilities that produce low carbon. Innovations such as use of electrical cars are being encouraged in a move to discourage too much carbon in the air as it is known to be harmful to human beings.
Environmental pollution can also mean using resources at a faster rate than is available. When corporations use resources such as water and electricity at a faster rate than is available, they are said to be contributing to environmental degradation. Corporations are therefore supposed to control their usage of such facilities so that the environment is not depleted of these resources in the long run.
Corporations are also encouraged to use renewable sources of energy such as wind and solar energy unlike non renewable sources such as petroleum and charcoal. This is because, in addition to saving the environment from depletion of the renewable resources, non renewable resources are environment friendly.
News media will go to great lengths to identify corporations that acknowledge their environment because they realize without the environment humanity is threatened. They will therefore dig deep into a corporation’s profits to find out whether part of the profits are being used for conservation of the environment. Where corporations do not give regard to preserving the environment despite making enormous profits, they are heavily criticized and those that do receive praises.
News media and multinationals
Multinational corporations are known to give very large reported profit figures because they have established their operations in very profitable regions of the world. However the media is very concerned with their operations in regard to their effect on humanity. That is why the news media is always looking out for areas where multinationals are exploiting people in areas where they operate.
Several multinationals have been known to take advantage of cheap labor and will therefore move their operations to areas where they can maximize their potential to use to exploit cheap labor. Big corporations have been known to make huge profits by using children to work for them. In return the wages paid are never enough to sustain these children’s needs.
They are also known to establish operations in areas where production facilities are fairly cheap. This has been known to be detrimental to the local industries which are over shadowed by the operations of multinationals.
The major reason for the news media to involve itself with the operations of multinationals is for them to improve the awareness of international law makers on the need to make rules that restrict multinationals from operating in whichever way they want.
Many reports by the media have shown that multinationals tend to move their operations from one country to another when they realize that one country’s laws on taxation are stricter than another’s.
News media uses profit figures to be able to evaluate multinationals that are making too much profit at the expense of the stakeholders involved. This can be seen from the cases of Enron, Tyco and Xerox, where the corporations’ management involved themselves in practices that were not intended to benefit the shareholders but themselves as well as avoiding their legal obligation to pay taxes.
CONCLUSION
News media use reported profits to judge whether a corporation’s profits reflect the true nature of a corporation profit making ability. They use them to analyze whether the profits are manipulated or not such as in Enron, Tyco and Xerox.Reported profits can also help to show that a corporation is involved in corporate social responsibility, or that it is involved in environment conservation programs. This can be found from reports of corporations detailing the amount of funds set aside for this purpose.
News media is also keen to prove that corporations operating internationally are observing social justice in order to avoid conflicts that come with social injustice. It is therefore important that the news media continues to use reported profits to find out corporations that are worth praising for giving accurate figures and those that use them for the benefit of society as a whole while criticizing those that manipulate profits to gain an unfair advantage.
References
Bennett, J. 2002, “Multinational corporations, social responsibility and conflict”, Journal of International Affairs, vol. 55, no. 2, pp. 393-393-410.
Carroll, G, 2010, Corporate Reputation and the News Media, Taylor and Francis.
Desai, M.A. 2005, “The Degradation of Reported Corporate Profits”, The Journal of Economic Perspectives, vol. 19, no. 4, pp. 171-171.
Neimark, M.K. 1995, “The selling of ethics: The ethics of business meets the business of ethics”, Accounting, Auditing & Accountability Journal, vol. 8, no. 3, pp. 81-81.
Rothenberg, S. & Becker, M. 2004, “Technical Assistance Programs and the Diffusion of Environmental Technologies in the Printing Industry: The Case of SMEs”, Business and Society, vol. 43, no. 4, pp. 366-366-397.
