‘Does Management Accounting need to consider ethics’
Introduction
In the modern day, the word ethics has been used more than ever before, especially in the accounting world. Ethics can be interpreted in a variety of ways depending on different situations, it is therefore defined as the ‘moral principles that govern a person's behaviour or the conducting of an activity.’(Oxford Dictionaries). The information gathered by management accountants is vital due to the sensitivity the importance of the financial records. The financial information supplied by the accountants can aid managers and chief officers in decision making. This means that, they can budget and make crucial decision on the future of the business, which will elimination of any uncertainties that may occur in the foreseeable future. (What is Management Accounting and its importance by Arvind Rongala June 2015 https://www.invensis.net/blog/finance-and-accounting/what-is-management-accounting-and-its-importance/ ).This essay will cover the issue of whether management accounting should consider ethics. It will study the importance of ethics, specifications and regulations which are set by professional organisations and whether management accountants should act ethical or not and potential fraud which was caused by unethical behaviour.
Ethical Standards
Whenever, a professional or non-professional accountant carrying out a piece of work is always required and expected to take into interest of who it has a benefit on. This means that they are always expected to present the best standard of ethical behaviour. Accounting information is provided to a large group of users both internally and externally. This information is used in decision making by managers and individuals, or third parties such as banks. If accountants do not follow an ethical conduct it may have serious consequences.
Jere Francis states that:
‘Accounting is suggested to be a practice in this sense and five possible internal rewards are identified: honesty, concern for the economic status of others, sensitivity to the value of both co‐operation and conflict, the communicative character of accounting practice, and the dissemination of economic information.’
(Francis J. (1990), “After Virtue? Accounting as a Moral and Discursive Practice” Accounting, Audit and Accountability Journal, Vol. 3, Iss.3, pp. 5-17.).
This statement paints a picture of the basic ethics accountants should follow when performing professional work.
Due to management accounting not being a legal requirement, there has been a large number of governing bodies who have established ethical standards for which accountants can follow. They vary from country to country but can be adapted in the style of work and all can be used as a good judgement. These organisations have the power to punish anyone who does not follow the ethical standers. One professional organisation for ethics is the Institution of Management Accounting, also known as the IMA. The IMA sets guidelines and standards for which accountants can follow in order to act ethically.
The standards which are set by the IMA are:
• Competence
• Confidentiality
• Integrity
• Credibility
(About ethics in managerial accounting by Osmond vitez https://smallbusiness.chron.com/ethics-managerial-accounting-3737.html )
Ethics can be adapted through education and motivation, which incentivises management accountants to act in the right way. An article by Froozan Kamari states that ‘in order to ethical motivation of management accounts, guidelines will be presented that implementing and performing these recommendations by organisations can result in motivation and consequently ethical intentions of management accountants.’ (Froozan Kamari, Ethics in management accounting: motivation towards ethical Motivation. 2012)
Management Accounting Should Consider Ethics
Accountants have a variety of reasons to act ethical. One reason for management accountants to act ethical is to avoid the penalties which are set by the professional organisations, as well as legal authorities. These punishments can lead exclusion from the profession to legal penalties for misconduct. The harsh nature of the punishments can disincentivise accountants to act in an unethical manner. However, an accountant may have religious beliefs or personal moral principles which they may chose to follow in order to act fair and ethical. Personal morals reduce corruptions and fraud in the accounting industry.
In addition, businesses may be motivated to encourage their accountants to act ethical and conduct certain regulations. Managers and business may influence accountants to act unethical in order to promote their business to potential investors. Study carried out by the ICAEW showed that 58% out of 487 accountants have been pressured to act unethical but only 8% have taken action. These people were bribed through things such as promotions or threats of ‘facing disciplinary action’. ( Jessica Fino 4th September 2018, ICAEW, https://economia.icaew.com/news/september-2018/over-half-of-accountants-pressured-to-act-unethically ) This shows that possessional organisations for ethics should not only be targeting accountants but also considering business ethics and the rational decision to act ethically.
Unethical conducts may lead to bankruptcy through wrong decisions being made such as deciding to present wrong information to stakeholders which will lead to a loss of business investors and shareholders meaning that the business net worth will drop significantly and will potentially result in low to no investors. An extreme example of business acting unethical is Enron. This scandal caused many financial boards to raise their accounting standards. Enron falsified their accounting records in order to make their business look better by valuing their assets higher than they were worth and hiding debts from their financial statements. This is known as ‘cooking’ the books. (Randi Hicks Rowe, 2018, Examples of Unethical Decisions that have ruined businesses, Azcentral, https://yourbusiness.azcentral.com/examples-unethical-decisions-ruined-businesses-21339.html ). This led to the business downfall, which reduced their share prices from $90.75 per share to $0.26 per share. (Troy Segal, 2018, Enron Scandal: The Fall of a Wall Street Darling https://www.investopedia.com/updates/enron-scandal-summary/ )
Management Accounting should not consider ethics
Accounting should always consider ethics. However, the ethical standards have a number of conflicts, this will make an accountant’s responsibility to act ethical more difficult. This is known as an ethical dilemma. In this situation an accountant should not follow the ethical standards but use their best moral judgement on the situation. https://examples.yourdictionary.com/ethical-dilemma-examples.html
For example, an accountant has transferred to work from one company to another but they both have the same objective. The accountant is not able to help pursue the objective of his new firm as he cannot disclose information which is required of him from the previous firm due to the confidentiality concept.
Ethics may not apply so strongly to certain situations in management accounting. If the information provided by management accountants stays internal and is only used in decision making, as well as, having no benefit of acting unethical and all incentives to act unethically are removed, then management accountants should not act ethically when providing information. This can be an example of when a firm is choosing to switch from buying and selling products to production. This may have small impact on dividend paid to shareholders and may not be appealing to new investors, but it does not discriminate any information provided to shareholders or wrong doing in decision making in order to act selfish or unethical.
Conclusion
In conclusion, there are many factors to persuade accountants to act unethical. However, due to good morals and organisations, which have created standards to follow, it has significantly reduced fraud and unethical conduct. This has allowed accountants to build up trust between their employers and employees. Therefore, management accounting should consider ethics, with a strong belief to implement it and act in the best interest of the public and the users of the financial statements produced by management accountants.