Ethics and Management Accounting
Management accountants Opens in new window apply professional judgment in deciding how to establish and operate accounting systems within an organization.
The potential trade-offs that exist because of the multiple uses of accounting systems make the management accountant’s judgment even more critical.
The management accountant frequently confronts decisions that affect the welfare of people inside and outside the organization.
The process of determining standards and procedures for dealing with judgmental decisions affecting other people is known as ethics.
Ethics do not give a specific answer to a problem, but suggest a process for dealing with the issue.
When faced with an ethical dilemma, the management accountant should gather sufficient information; conflicts often disappear when sufficient information comes to light.
The management accountant should then determine how stakeholders are affected. Crises often arise when the effect on some individual or group is forgotten or ignored.
For example, suppose a controller Opens in new window finds inventory items that are outdated by newer models. The old inventory items can only be sold below their historic cost.
Their sale or write-down will cause a reported loss on the accounting statements and will harm the chances of the divisional employees’ obtaining a bonus.
The controller could simply ignore the old inventory; however, there is a cost to keep the goods in storage. Although recognition of the loss associated with the old inventory may harm the current employees, other parties would be harmed if they continued to ignore it.
The owners would have to continue to pay storage costs, and bonuses of future employees may be affected if the loss is postponed.
Moreover, avoiding the inventory write-down violates generally accepted accounting procedures, and jeopardizes the organization’s financial credibility with outside stakeholders who rely on the external reports for investment and regulatory purposes.
Once the impact on all the parties is examined, the controller will have more information to make a judgment.
A code of ethics assists the management accountant in making judgment decisions. Organizations frequently have a code of ethics that deals with standard problems facing the management accountant.
This code of ethics reinforces the organization’s control system to reduce the risk of unacceptable behavior. Organizations also develop their own ethical commitments and standards that reflect their operating environment and culture.
Moreover, ethical standards will differ across countries and the management accountant must be alert to the possibility that such differences may result in ethical dilemmas.
An ethics control system provides guidance in decision making and a framework for accountability.
With products available in over 200 countries and global operations, the Coca-Cola Company Opens in new window recognized that employees often faced ethical dilemmas that were open to a number of different interpretations.
Along with its written Code of Business Conduct, Coca-Cola Opens in new window maintains worldwide ethics training programs to provide information regarding potential ethical issues, to review ethical expectations in a number of areas including bribery, government and community relations, and conflicts of interest, and to outline resources available to resolve such issues when they arise.
The training is also an important mechanism to provide a corporate-wide approach to ethical issues across the firm’s global operations. The establishment of ethical standards is an important tool to help organizational members make appropriate choices.
Various professional bodies of management accountants also have a code of ethics. For example, the Chartered Institute of Management Accountants (CIMA) Opens in new window has prescribed the following set of ethical standards:
CIMA Code of Ethics for Professional Accountants:
- Integrity — to be straightforward and honest in all professional and business relationships.
- Objectivity — to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
- Professional Competence and Due Care — to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.
- Confidentiality — to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties.
- Professional Behavior — to comply with relevant laws and regulations and avoid any action that discredits the profession.
This code of ethics is not sufficient to solve all ethical problems, but it provides a framework for the management accountant Opens in new window.
In the case of the controller Opens in new window who found the old inventory, the integrity section of the code of ethics suggests that the decision to recognize the loss immediately is consistent with the communication of unbiased information.
Alternatively, the current employees should not be held responsible for the loss because old inventory reflects a decision in prior years to produce extra inventory.
In a global market, and with a trend to delegate decision making to lower levels of the organization, organizations often implement ethics programs to ensure that employees understand how ethics relates to the organization’s core strategies.
Management accountants Opens in new window provide advice and support for the implementation of ethical policies and strategies, especially given their role in decision making and control.
The Institute of Management Accountants (IMA) Opens in new window in the US, the Chartered Institute of Management Accountants (CIMA) Opens in new window in the UK, and the Chartered Professional Accountants of Canada (CPA Canada) Opens in new window also administer programs that quality certified management accountants (CMAs).
Applicants must acquire practical experience and pass examinations in management accounting and in related fields including economics, finance, financial accounting, organizational behavior, and decision analysis.
The IMA, CIMA, and CPA Canada work together with other international partners to foster the profession’s role in the global marketplace.