Question

Objective 4 - Understand the importance of ethical behavior for management accountants.
Emily Henson, controller of an oil exploration division, has just been
approached by Tim Wilson, the divisional manager. Tim told Emily that the projected quarterly profits were unacceptable and that expenses need to be reduced. He suggested that a clean and easy way to reduce expenses is to assign the exploration and drilling costs of four dry holes to those of two successful holes. By doing so, the costs could be capitalized and not expensed, reducing the costs that need to be recognized for the quarter. He further argued that the treatment is reasonable because the exploration and drilling all occurred in the same field; thus, the unsuccessful efforts really were
the costs of identifying the successful holes. "Besides," he argued, "even if the treatment is wrong, it can be corrected in the annual financial statements.Next quarter's revenues will be more and can absorb any reversal without causing any severe damage to that quarter's profits. It's this quarter's profits that need some help."
Emily was uncomfortable with the request because generally accepted accounting principles do not sanction the type of accounting measures proposed by Tim.

Answer 1

An individual, employee or a professional may face an ethical dilemma where it will be difficult for him / her to take a position or stand or decision. It becomes difficult to figure out what is good or bad, give the situation and circumstances. Ethical standards guide an accountant’s act in a challenging situation so that he / she can meet his obligations towards the profession, organization and public.

There are four overarching ethical principles

Sl. No.	Principle	What it means
1.	Honesty	Truthfulness, sincere, frank, straightforward of conduct, fairness, displaying integrity, freedom from deceit or fraud
2.	Fairness	Unbiased, honest, acting in an impartial manner, free from dishonesty or injustice, open-minded, tolerant, accepting, communicating information fairly and objectively
3.	Objectivity	Judgement based on established sets of criteria, unbiased and free from prejudice
4.	Responsibility	Doing what you say you will do when you say you will do it, answerable or accountable for something that is within one's own power, control or management

Emily is facing an ethical dilema here. Suggestion by Tim should not be acted upon because it violates all the four overarching principles of  ethical behavior for management accountants.

Emily should not succumb to the opinion or advice. She needs to overpower her desire. She should act honestly, fairly and objectively and not understate the expenses.