Ethics in management accounting is very blurred compared to the obvious unethical practices that occur in financial accounting, however it is evident that personal and professional ethics are important within the practice. If they were not, major accounting bodies such as CIMA and the IMA would not produce and revise extensive Codes of Ethics that management accountants must adhere to in order to fulfil their duty both to their corporation and active community. Despite these codes, management accounting is still given a certain degree of freedom by law compared to financial accounting which should be viewed not as a rationalisation to act unethically, but as an opportunity to provide due diligence that maximises both the economic and social growth of a business. This essay will discuss the implications of ethical management accounting and ultimately answer the topic question.
Management accountants provide accounting information to managers and directors and assist in the setting of targets for individual employees as well as the corporation as a whole. Over the past century it has become clear that employees are not just motivated by financial gain, “evidence indicates that individuals respond to ethical and moral principles in addition to economic incentives.” (Sprinkle, 2003 p288). This suggests that by creating goals and targets that are ethically driven, such as improving an organisation’s contribution to charity or reducing waste, management accountants can improve the moral of employees and increase their productivity. Furthermore, by advising fair targets that employees see as achievable, subordinates will be less likely to act un-ethically by inflating their performance and will behave as ideal “organisational citizens” (Endenich and Trapp, 2018). Therefor if a management accountant is ethical when advising managers about setting targets for employees they will perform more efficiently and result in economic gain for the corporation. However, in order to set these targets a management accountant must have ethical principles of their own.
There are 3 main branches of ethics: virtue ethics, deontology and consequentialism. Deontology emphasises on moral duties or rules and consequentialism on consequences of actions (Hursthouse, R. 2003), however this essay will keep to virtue ethics. A recent definition of virtue is "An acquired human quality, the possession and exercise of which tends to enable us to achieve those goods which are internal."(MacIntyre, 1984). The key feature of virtue ethics is the theory of internal and external goods and the distinction between them – external goods include money and status whereas internal goods arise from “the internal desire to do well” (Francis, 1990). Virtue ethics relies on an active community surrounding an individual for which their internal goods can benefit (Dobson, 1997, Francis, 1990) so for an accountant this would be his corporation. Therefor by acting ethically and prioritising internal virtues an accountant will benefit his corporation which is the role of any employee. An example would be behaving honestly which is an internal virtue that can come into conflict with external virtues such as retaining a client or omitting financials.
Putting this example into real world practice I present Jose L. Gomez, who was a partner at accounting firm Grant Thornton Co. during the collapse of ESM Government Securities in 1985. Gomez had audited ESM’s accounts for 2 years before he was told by a senior ESM manager that the “companies loses were being disguised through fictitious transactions on ESM’s books” (Behr, 1986). Gomez opted to help cover up the companies loses and take hush money but eventually ESM collapsed, and Gomez was charged with conspiracy and fraud. (Francis, 1990) Gomez had just been promoted to partner and it was mainly due to his ESM account, he chose to prioritise the external goods of money and status over internal virtues and it landed him a twelve-year prison sentence. Management accountants should want to act ethically in order to benefit the community around them, however they need to act ethically in order to avoid the grave repercussions that Jose L. Gomez experienced.
Another way to look at the question of this paper would be “what are the consequences of a management accountant acting unethically?” Apart from individual reverberations an accountant could also jeopardise their corporation, employees and leave other stakeholders exposed. Such as with the Enron collapse in 2002 which was due to “questionable financial engineering, misstated earnings and persistent efforts to keep investors in the dark” (Emshwiller and Smith, 2001). The collapse resulted in estimated losses totalling $74 billion and lots of lives ruined, which is counter to basic ethic principles. In layman terms, if the accountants had acted ethically and not omitted or hidden financial information the repercussions would have been much less severe, and the community would be better off as a whole. Accountability is featured as a fundamental principle in various codes of ethics and is “an implicit purpose for why we do accounting.” (Francis, 1990).
Contrarily, there is an argument to be made that management accountants do not need to be ethical. Economic theory assumes that firms want to maximise profit and there is the legal argument that shareholders own the firm, so the firm should be run for their benefit. (Drury, 2017 p8). This suggests that management accountants may choose to advise managers and directors to prioritise economic objectives over social objectives, for example choosing to pay a higher dividend rather than invest profits into reducing pollution. This would be acting unethically, as it is unfavourable to the ‘community’ (general public) that the accountant is practising within. Furthermore, although short term this may increase profits within the organisation, in the long term it may be detrimental due to awareness that other non-financial factors such as customer satisfaction can result in increased financial results. (Endenich and Trapp, 2018) Customers may be unsatisfied about the choice to pay a higher dividend and stop supporting the business.
In conclusion, if the essay topic was “Should management accounting be ethical?” then the answer would be very simple: yes. Although this is not the case, and due to the lack of regulation and red tape surrounding the practice, and the fact that information is presented internally, management accountants do not need to act ethically. However, as Enron and Jose L. Gomez have demonstrated it is in their best interests to otherwise the repercussions can be monumental both for the corporation and the accountant. Furthermore, the primary goal for the majority of corporations is growth and changing consumer trends has made business ethics a key contributor to this growth. Therefor management accountants do need to be ethical in their role as it will indirectly promote economic growth, both through consumer satisfaction and employee morale.