Question

Book: Managerial Accounting - The Cornerstone of Business Decision Making, 7th Edition

For this assignment discuss the importance of ethics in managerial accounting. What issues may arise if ethics is compromised? How would this impact the company internally, how would it impact the external users such as investors, creditors, government, etc?

Please make sure to utilize your points of view, as they matter the most to me. I am not interested in an article from the internet.

Answer 1

Ans:

Managerial accounting is an internal business function responsible for managing a company’s financial information. Business owners often use managerial accounting to allocate business costs to goods or services, prepare operational budgets and forecast production output or sales. Ethics is an important part of managerial accounting, and companies may develop a code of ethics or conduct to set the expected ethical behavior for accountants.

Facts

The Institute of Management Accountants (IMA) is a professional organization responsible for creating managerial accounting guidelines. The IMA provides managerial accounting ethics for licensed accountants, and non-licensed accountants also can use these ethical standards to govern their accounting career. The IMA’s ethical principles are based on honesty, fairness, objectivity and responsibility. IMA members must use these ethical principles when engaging in accounting services for their company and the general public.

Standards

The IMA notes the following ethical standards in managerial accounting: competence, confidentiality, integrity and credibility. Competence is an accountant’s ability to use professional expertise and develop his accounting knowledge and skills. Confidentiality requires accountants to disclose information only at their supervisor’s discretion. Integrity prohibits managerial accountants from engaging in unethical conduct. Credibility refers to the accountant’s ability to communicate accounting information fairly and objectively to all business stakeholders.

Function

Managerial ethics ensures all financial information is reported to business owners, directors or managers. Accountants who fail to report negative information or use a company’s internal financial information for personal gain can create serious legal situations for businesses. Business owners often require all information, whether good or bad, when reviewing business operations and making decisions. Accounting ethics also ensures that each employee can be trusted with sensitive business information.

Misconceptions

Companies may choose to act unethically in the business environment. Business owners may determine that unethical behavior is not necessarily illegal, a logic that creates a gray-shaded area in business. Managerial accountants constantly may push ethical limits when recording and reporting financial information. Companies may need to provide detailed explanations to those conducting external audits regarding questionable accounting procedures.

Warning

Accountants who fail to abide by the IMA’s accounting ethical code face a variety of punishments. Accountants may lose their professional certification, be removed from accounting positions and face legal penalties depending on their inappropriate actions. Managerial accountants who do not disclose inappropriate accounting operations in their company also can be held liable. Maintaining the general public’s trust in companies is a primary responsibility of managerial accountants.

Importance:The function of management accounting is to support competitive decision making by collecting, processing, and communicating information that helps managers plan, control, and evaluate business processes and company strategy. The top accountant in most large organizations is usually called the controller. In most organizations, professionals responsible for accounting systems and other critical decision-support data report to the controller. The controller usually reports to a vice president of finance or perhaps the chief finance officer (CFO). This individual, in turn, reports to the organization's president or chief executive officer (CEO).

As the chief accounting officer, the controller is ultimately responsible for what information is created to manage the organization, as well as how that information is used. This individual and others who work with him or her are in a position of significant power. Those who manage the management accounting process have access to the organization's most important and sensitive competitive information. Therefore, it is absolutely critical that these individuals conduct their work professionally and with utmost integrity. Otherwise, the consequences of unethical behavior in the practice of management accounting can ruin (and, on occasion, have ruined) individuals, companies, and communities.

Unfortunately, ethical dilemmas in both large and small organizations are not rare. As whitecollar crime continues to rise, those who work in management accounting are often confronted with ethical issues on the job and need to be prepared to deal with them rationally. If your career path leads you to a position that involves management accounting (and most management positions do), you will find that dealing with these types of ethical indiscretions is not easy. The situation is often complicated by the fact that the violators are frequently people you know and work with. Some of the ethical dilemmas that business professionals may be exposed to are listed in Figure 1-4.

Your role as a member of the management team requires that you work to handle questions of ethics within the organization. However, some occasions may require you to involve outside authorities. The Institute of Management Accountants (IMA) is the leading professional organization in North America devoted exclusively to management accounting. Its goals are to help those working in management accounting develop themselves both personally and professionally, by means of education, certification, and association with other business professionals. As a respected leader within the global financial community, the IMA's Statement of Ethical Professional Practice provide guidance to practitioners for maintaining the highest levels of ethical conduct. Essentially, the IMA notes that its members are ethically required to

• Be competent in their profession

• Not disclose confidential information

• Act with both actual and apparent integrity in all situations

• Maintain objectivity when communicating information to decision makers

If confronted with situations that may involve ethical conflicts, the business professional should consider the following courses of action:

• Discuss the problem with an immediate supervisor (higher management levels should be approached only when the supervisor is involved).

• Confidentially use an objective advisor, if needed, to help clarify the issues.

• Resign from the organization and submit an informative report to an appropriate representative of the organization (after exhausting all levels of internal communication).

Although the IMA has a formal code of ethics, there really isn't a perfect set of rules you can follow to help you resolve every conflict. Therefore, you need to be developing values and skills right now in order to prepare for future challenges. To help you, we have included at least one ethics case at the end of each topic. Perhaps more than anything else you do, developing a commitment to and an understanding of good ethics will develop you into a great business professional and will help improve our society.

What issues may arise if ethics is compromised?

When you run a business it's easy to think of your accounting staff as glorified mechanics, people with specialized skills needed to keep your company's financial machinery running properly. That's true to a point, but accountants also play a role as the watchdogs of the business world. They're responsible for making sure that businesses report their finances clearly and according to recognized standards, and that often puts them in situations that can be ethically or even legally dubious.

Pressure to Manipulate the Figures

Running a business puts you under a great deal of pressure, especially when things are not going well, or at least not as well as you need them to go. When that happens, the temptation to lean on your accountant to fudge the numbers can be hard to resist. It's a real problem for accountants, whether they're employees or an outside firm you've hired.

They have a clear ethical – and legal – obligation to report your financial situation accurately, and failing to do that can open them to civil or criminal liability, bringing their careers to a sudden stop. On the other hand, they also have to make a living and may fear losing their jobs, or clients, if they don't play along.

Sins of Omission

An accountant might also feel pressure to simply leave things out of financial reports if they'd cast a shadow over the company. This is the flip side of actively misrepresenting numbers, and psychologically it might feel easier. It's the equivalent of a child choosing between outright lying to Mom or simply leaving room for her to stay happily unaware of some bad behavior. At the end of the day, though, both are equally wrong.

An investor who buys into your company without knowing about a potential problem isn't in a position to assess the risks accurately. Such was the recent case with Theranos founder Elizabeth Holmes who misrepresented the effectiveness of her medical devices by demonstrating the technology of other companies when pursing high-level investors. In much the same way, an accountant who's telling you what you want to hear can leave gaps in the management information you need to run your company effectively. That can come back to haunt you if you make a major business decision based on incomplete information.

Access to Information and Confidentiality Issues

Like doctors and lawyers, accountants naturally spend much of their time dealing with confidential information. Using that information inappropriately, or failing to protect confidential information properly, are both ethical issues for an accountant. Insider trading – use of confidential information to take advantage of an upcoming growth or drop in the company's value – is one of the most obvious issues. The high profile cases involving Martha Stewart and more recently Rep. Chris Collins are examples of insider trading.

Sharing knowledge of your company with a competitor, or making it possible for outsiders to steal your information through negligence, are two others. Ironically, taking a principled stand on an ethical issue can also be a breach of confidentiality. If your accounting team leave abruptly at a sensitive moment for your company, and everyone remains tight-lipped about the reasons, outsiders might infer that you've been up to something.

Conflicts of Interest

Conflicts of interest can be an especially difficult ethical issue to recognize. If your senior accounting staff receives bonuses based on the stock price, for example, they have a motivation – consciously or unconsciously – to make decisions that favor higher stock prices, even if they're not good for the company or its investors in the longer term. For similar reasons, accountants doing audits of your company's financials might follow the folk wisdom that says, "don't ask questions you don't want answers to." Thinking clearly about the biases you've built into your company's culture isn't easy, but it can help keep those problems from coming up over time.

Blowing the Whistle

One final ethical dilemma accountants may face is the thorny question of when to blow the whistle on a company or a division that's unethically manipulating or misstating its numbers. If the accountant's information is damaging enough, it could cause a company to fail or lose much of its stock value overnight. That can hurt thousands of investors, or put the accountant's own friends and co-workers out of work and into financial jeopardy. There's a very real risk of backlash and intimidation, and a reputation as a troublemaker can be a career-breaker.

While it's one thing to raise questions inside the company, bringing in regulators or criminal investigators raises the ante in a big way. However, for those who take the moral high road, the Securities and Exchange Commission (SEC) offers a Whistleblower Program to assist those wanting to come forward about financial indiscretions. The program offers confidentiality and in some cases financial reward for successful enforcement action.

How would this impact the company internally, how would it impact the external users such as investors, creditors, government, etc?

“Leadership that allows for mediocrity to first exist and then remain, rather than demand the highest level of conduct within a department, can create a climate ripe for misconduct.” – leb.fbi.gov

Companies have probably never felt so compelled ever before to be customer-focused. Customers are more demanding, smart and know exactly how to get what they want. In the highly competitive and challenging business environment, companies have no choice but to comply. The challenges do not end with becoming oriented towards customer needs alone – customers must be able to trust that companies and their representatives are honest and ethical. Among the strongest pillars of any business relationship now, is trust, and customers prefer doing business with companies that have a reputation for being honest and transparent in their dealings. Research has shown that the effects of unethical behaviour on business are many and detrimental to a company and one incident that contradicts a customer’s belief in the company is often enough to destroy their trust. “Trust takes years to build, seconds to break, and forever to repair.”

Despite the truth of the quote and the labour and investment required to gain customers, the harsh reality is that almost every company will have some ‘malefactors’ who are not ashamed to indulge in dishonesty. They completely ignore the effects of unethical behaviour on the business of their company. Unethical behaviour could be a range of things – using company property for personal gains, dishonesty in financial dealings, accepting and giving bribes and possibly the worst – insider trading. Some companies do not hesitate to offer huge ‘incentives’ to land lucrative contracts, government deals and other such transactions that will optimize their profits – irrespective of the damage they may cause to others. These companies, as they become stronger from building ‘associations’ care less and less for their employees and customers. Their only aim is to gain profits through whatever means possible.

The effects of unethical behaviour on business begin to tell with time – as the line between right and wrong begins to blur. People within the organization that conduct themselves with high standards feel helpless and annoyed with the dishonest behaviour of their co-workers and or leaders. This frustration is compounded further by the fact that the company does not take action given that there may not be any legal implications or great financial damage. The honest employees then either look for alternative employment or if they are unable to find another suitable opportunity often end up with high stress and health related problems – thereby affecting the overall productivity of the company.

While the unethical behaviour and practices may succeed for a while, they are soon found out. Persons and companies found guilty of such practices would then be scrutinized and publicly shamed. Companies often end up losing their license to conduct business and their reputation is damaged forever. Even if a company does not immediately get ‘found out’, customers and employees begin to perceive unethical behaviour. The result would be that they would stop doing business with the company and leave the employment respectively. Customers would most certainly let others know about the poor practices of the company, leading others to stay away from such a company – further damaging the chances of the company.

Among the worst effects of unethical behaviour on business is that a company is unable to forge or maintain any long-term relationships with customers. In addition, it becomes vulnerable to long and expensive litigations. The fact is that even one such instance can make the company vulnerable to further accusations, many of which could be false, made by people and competitors seeking to harm the company’s reputation. While customers do have access to a lot of information by way of the internet and other market intelligence, they do rely heavily on the company and its representatives for accurate information and structured guidance on a number of aspects. Therefore, as the business environment becomes more competitive, companies must make the decision to act ethically or else face the highly damaging effects of unethical behaviour on their business and the representatives. It would be extremely immature and imprudent on the part of companies to believe that customers are naïve and would not find out eventually about the company’s malpractices.

Another of the effects of unethical behaviour on business is that customers would completely shun the company’s products and start a campaign inciting others to follow. A drop in sales means a dip in profits and a fall in the company’s share prices, which eventually would drive investors and other stakeholders away from the company since no one would want to put their hard-earned money in a failing company. The company internally too would have an environment of confusion, distrust, stress and conflict since each person would doubt the intentions of the other. Such a poor work environment would lead to a drop in productivity, lowered morale and employee attrition, which would lead to the downfall of the company.

The reason that unethical behaviour rises and survives is because people within a company are afraid and hesitant to ‘tell on’ their co-workers since they would be unsure of whom they can speak. If the culture seems to tolerate unethical behaviour, the fear of reprimand or being made an ‘outcast’ often leads people to remain silent. In order to counter the effects of unethical behaviour on business, the company must have strict rules and regulations in place that every employee must be aware and there should be no-tolerance policy for anyone that flouts the norms. Many companies have such guidelines in document form that is provided to each person that joins the company and they are expected to read and sign the document as acknowledgement of having understood the consequences in case they default.

Within the realm of customer service, the effects of unethical behaviour on business can be profound as they are more noticeable. The representatives are usually the first point of contact for customers and thereafter would be the ones that customers interact with most often. The pressure on the customer service staff is extremely high – they are not only expected to provide service but also build relationships, have product knowledge, have great analytical, problem solving and communication skills and many other such abilities. To top these demands, their jobs are often incentive based, which could be added stress. They are often evaluated on a day-to-day basis and thus to gain more benefits could easily forget the effects of unethical behaviour on business and seek only their personal gain and often end up misleading customers. Over time, customers begin to realize these transgressions, which could spell serious trouble and even doom for the company. The errant employees too would end up losing their job and find it difficult to gain employment elsewhere.

There is no upside to unethical behaviour. It just means that either the company is doing so intentionally or it has been extremely lax in planning its business and lacks customer focus. A company must set realistic goals for itself and its employees – since seemingly unattainable targets would lead employees to find ‘shortcuts’ and lucrative means to reach them. A company and its leaders must set the bar high such that each person in the company understands their responsibility towards the customers and of behaving ethically. The effects of unethical behaviour on business must be clearly spelt out along with the consequences of indulging in such behaviour. There is no excuse or reason for cheating or behaving unethically with customers and in business and companies and their employees that continue to do so must face the repercussions.

Companies with a strong ethical identity tend to maintain a higher degree of stakeholder satisfaction, positively influencing the financial results of the company, according to the Ethical Investment Research Service. Conversely, lack of personal and professional ethics can lead to negative financial results, as recently evidenced by the collapse of Wall Street firms. Risky loans and questionable business practices put many banking and insurance firms in a precarious position. Ensuring ethical behavior at your company can help improve your company's economic performance.

Unnecessary Risks

In our capitalist society, the economy emphasizes private ownership in a privately controlled economy. Companies exist primarily to make money for their owners and shareholders. Generating a profit is the main goal. Short-term profit tends to be more important than long-term success. Without confidence in management, stakeholders tend to limit investments, negatively affecting growth. According to EIRIS, studies show that ethics-related news influences a company's share price for better or worse, revealing effects of between 0.5% and 3% of share price.

Return on Investment

Whether a company has outside investors, relies on venture-capital funding or reinvests its own profits, keeping accurate records is essential to long-term success. Announcing large returns that are the result of fraudulent accounting can lead to issues that ultimately hurt a company's performance. Ethical business practices can help companies avoid legal problems and negative financial results that arise once the unethical behavior is discovered. These practices can also help companies provide a consistent return on investment as they continue focusing on operating effectively and efficiently without the distractions of bad press and negative public perception, hurting business.

Green Environmental Practices

As people become more aware of companies' impact on the environment, they want to do business with companies that reflect their values. For example, if your production processes cause water pollution, you may be able to conduct business in a cost-effective manner for the short term, but public opinion and pressure to improve your impact on the environment may actually reduce your sales profit in the long run. Avoid these situations by acting responsibly in the first place.

Employee Morale

Employees prefer to work at companies where they will be treated with dignity, respect and fairness. When companies establish a high standard for ethical business conduct, employees know that they will be treated well. In return, they treat customers the same way. Companies with high levels of customer satisfaction tend to generate a higher degree of customer loyalty, repeat business and more market share in the long run. Customers may decline to deal with a business that causes them to be suspicious and afraid. Businesses that contribute to their community, maintain good relationships with government authorities and other businesses tend to be more successful in the long run. These companies will not get distracted by unnecessary lawsuits and other activities that detract from producing quality products and services that enable positive financial results for the company.