TOPIC 4 - Ethics in Management Accounting.pdf

Ethics in Management Accounting TOPIC 4 Objectives At the end of the session the students should be able to: 1. understand the ethics in Management Accounting; 2. examine the Standards of Ethical Conduct for Management Acc...

Ethics in Management Accounting TOPIC 4 Objectives At the end of the session the students should be able to: 1. understand the ethics in Management Accounting; 2. examine the Standards of Ethical Conduct for Management Accountants; 3. describe the four components of James Rest's model for ethical decision making: and 4. implement the standards of ethical conduct to resolve ethical conflicts. Ethics in Management Accounting In the business reality of the 21st Century, where knowledge management and intangible assets are key sources of competitive advantage, the individual behavior of employees from to management to front-line workers can make or break an organization’s reputation. This has a significant impact on share value, the ability to attract and retain clients, investors, employees, or customers, and the risk of compliance violations (IMA 2008). 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. In today’s business environment, the role of accountants is significant. Managers and other decision makers base their decisions mainly on information that accountants provide. Accuracy of decisions depends on the reliability of accounting information; the ethical dimension of the profession has gained considerable attention. Organizations are now re-examining ethics in the accounting profession with a renewed interest in training and developing individuals to reinforce strong ethical principles and behavior. Due to the sensitivity around a company’s financials, a study of accounting ethics is required as it is an essential aspect of the roles of auditors and accountants in preparation of financial statements. Generally, the term ethics refers to morals or a code system that strongly offers the criteria for distinguishing between wrong and right (Banerjee & Ercetin, 2014). Ethical dilemmas are common occurrence in the workplace and originate from a situation where a group or an individual must decide between two options, where the answer is not always black or white. For managers, investors, and even small-business owners, it is imperative to learn accounting ethics and their functions to avoid financial and legal dilemmas due to the misrepresentation of financial statements. Financial statements, created with the element of independence and upholding the required ethical attributes, minimize errors and generate suitable information for the users of financial statements (Stice & Stice, 2012). Users of financial statements rely on the accuracy, fair, and truthful representation of financial statements and auditors’ opinions regarding whether the statements represent the fair value of the organization (Ronen, 2008). Even auditors and accountants, who are responsible for the integrity of a company’s financials, can utilize their ethics knowledge to overcome the ethical dilemmas that they face as they perform their roles. Ultimately, the role of accountants and their relationship to the production of clean and accurate financial statements enhances the reputation of the company in relation to investors, creditors, and other users (Mukarushem & Kule, 2016). Standards of Ethical Conduct for Management Accountants Management accountants should behave ethically. They have an obligation to follow the highest standards of ethical responsibility and maintain good professional image. The Institute of Management Accountants (IMA). The IMA notes the following ethical standards in managerial accounting: competence, confidentiality, integrity, and credibility. 1. Competence is an accountant’s ability to use professional expertise and develop his accounting knowledge and skills. Maintain an appropriate level of professional expertise by continually developing knowledge and skills. Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely.  Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. 1. Confidentiality requires accountants to disclose information only at their supervisor’s discretion. Keep information confidential except when disclosure is authorized or legally required. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance. Refrain from using confidential information for unethical or illegal advantage. 2. Integrity prohibits managerial accountants from engaging in unethical conduct. Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Abstain from engaging in or supporting any activity that might discredit the profession. 3. Credibility refers to the accountant’s ability to communicate accounting information fairly and objectively to all business stakeholders. Communicate information fairly and objectively. Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law 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. How Do We Make Ethical Decisions? One way to make ethical decisions is to employ the four-component model, which was devised by James Rest, a professor at the University of Minnesota. The model involves the following four processes: 1. Moral sensitivity. The person must be able to interpret a situation in terms of specific courses of action, determine who could be affected by each action, and understand how the affected party would interpret the effect. The essential element here is being able to see things from the perspective of others, which requires a person to pay full attention to hear an ethical problem in what someone says. Ethical listening requires a person to avoid lecturing, giving advice, or correcting comments so that the other party feels free to talk openly and move closer to a resolution. For example, when a fellow employee pays for a hotel suite, rather than a standard hotel room, the person doing so may feel justified because he will be away from home for a prolonged period and wants the extra space, while someone else might consider this to be a moral lapse because it violates the company’s travel policy. 1. Moral judgment. The person must be able to judge which of the possible actions is right, leading to a decision regarding what to do. This step requires knowledge of concepts, codes of conduct, and ethical principles, thereby allowing one to identify the guidelines that can be used to support a decision. For example, if senior management is actively encouraging employees to stay in the office for long periods of time, their personal use of the company copier might be considered acceptable, because that is the context within which the activity is occurring. 2. Moral motivation. The person must be able to formulate the actions to be taken to achieve the desired outcome. Consider these actions in relation to the likely pushback from others and understand what can realistically be accomplished. For example, a controller who investigates a theft of petty cash discovers that the president’s cousin is the perpetrator. Bringing this issue to the attention of the president will stop the loss of cash, but also incur the ire of the president. 3. Moral character. The person must possess sufficient courage to follow through on his intentions. Thus, a person is lacking in moral character if he is weak willed or is easily distracted or discouraged. For example, when a chief financial officer is aware that her controller has engaged in fraudulent activities but decides not to fire the controller, she is lacking in moral character. Most people do not engage in such a protracted amount of self-analysis every time they encounter an ethical quandary. Instead, they are more likely to make a rapid decision based on their experiences with similar situations in the past. Doing so preserves their time for more difficult ethical issues that they have not encountered before. Resolution of Ethical Conflict Professional organizations like IMA support management accountants in recognizing and solving specific situations or dilemmas which management accountants may encounter by preparing codes of ethics and teaching them. When faced with ethical issues, follow organization's established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, consider the following courses of action: Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior's knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action. Consult your own attorney as to legal obligations and rights concerning the ethical conflict. The human ability to make rational decisions is commonly seen as one of the most important processes at the mental level. This decision making involves the estimation of a set of probabilities whose selection determines the individual's action. The process of ethical decision-making was assumed as the ability of an individual to assess ethically, the right and the wrong. In the case of a decision process with specific characteristics, with direct influences, both in moral intensity and in human characteristics, it is noticeable the relationship to the need for cognition. References: Amat, O, Blake,J, Dowds, J(1991), ”The Ethics of Creative Accounting”, Journal of Economic Literature Classification: M41. BabakJamshidinavid&Foroozan Kamari2. Ethics in Management Accounting: Moving toward Ethical Motivation. Retrieved from https://core.ac.uk/download/pdf/234629307.pdf Banerjee, S., &Ercetin, S. S. (2014). Chaos, complexity and leadership 2012. Dordrecht: Springer Science & Business Media Press. Ethicssage.com.(10/23/2018).How Do We Make Ethical Decisions? An Essay Rest’s Model of Ethical Behavior. Retrieved from https://www.ethicssage.com/2018/10/how-do- we-make-ethical-decisions-an-essay.html Institute of Management Accountants (IMA), (2008),”Values And Ethics: From Inception to Practice”, Published by IMA. Larsen, E, J (1997). Modern Advanced Accounting-review Q & exr. Standards of Ethical Conduct for Management Accountants. Retrieved from https://www.accountingverse.com/ managerial-accounting/introduction/code-of-ethics.html Mukarushem, V., &Kule, J. W. (2016). Effect of financial statement analysis on investment decision making: A case of Bank of KIgali. European Journal of Business and Social Sciences, 5(6), 279-303. Ronen, J. (2008). To fair value or not to fair value: A broader perspective. ABACUS, 44(2), 181- 208. Stice, E. K., &Stice, J. D. (2012). Intermediate accounting. Mason, OH: SouthWestern/Cengage Learning Press. Taicu, M (2007) “Ethics in Management Accounting”, Scientific Bulletin- Economic Science. Vol.9. ChronContributor(October 15, 2020 ). About Ethics in Managerial Accounting. Retrieved from https://smallbusiness.chron.com/ethics-managerial-accounting-3737.html