21 Ethics and Management Accounting Flashcards
What is the meaning of ethical behaviour
- Ethics involves broad principles which guide behaviour to ensure that it is moral and to establish the moral fitness of a decision. An act or decision is either right or wrong according to moral principles rather than rules or laws.
- Acting ethically is to act according to a set of moral principles which transcend present circumstances, and which may be temporally immutable.
- There will be some forms of behaviour which are regarded as morally, as opposed to legally, wrong which will not change across cultures or over time
What is the ethical hierarchy
- The order in which people are repulsed by something when crossed
- An action that is prohibited by law should be unacceptable by society, by one’s profession, by the organization, and then by each individual.
- However, some laws may prohibit certain behaviours which should not be seen as unacceptable by society
o Nuremberg Laws of 1936 in Germany - An action that is legally and socially acceptable may be professionally unacceptable. This was not the case with medical experiments in Nazi Germany that were carried out by the medical profession of behalf of the government as part of racial and social persecution of Jews, homosexuals, twins.
What are the levels of the ethical hierarchy
- Legal rules
- Societal norms
- Professional memberships (CIMA)
- Organizational/group norms eg. Quakers and war
- Personal norms
How does ethical behaviour pressure management control systems
- The key MACS users (managers) are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations
- These pressures include the following:
o Requests to tailor information to favour particular individuals or groups
o Pleas to falsify reports or test results
o Solicitations for confidential information
o Pressures to ignore questionable or unethical practices - Too often no one thinks to ask the question “Is it right?”, or “How would I feel if my wife/husband/partner/children found out about this?”
What is the importance of ethics in organisational standards
- The way an individual responds to pressure derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards
- As noted earlier, if individuals see unethical or illegal behaviour practiced by the organization’s leaders and superiors or co-workers, they may feel that such behaviour is accepted and sanctioned
What is the important of personal beliefs in corporate ethics
- An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behaviour when a difficult or conflicting situation arises
o Such as being asked to misrepresent an organization unit’s performance potential when the unit is being offered for sale
What are ethical confilcits
When you are in ethical conflict with your management you should act in accordance to the law, professional standards and your own personal beliefs
What is the role of the senior manager in ethical conflicts
- A critical variable that can reduce ethical conflicts is the way that the chief executive and other senior managers behave and conduct business
o Look up to manager see how things are done and follow suit - If these individuals demonstrate exemplary behaviour, other organizational members will have role models to emulate
- Organizations whose leaders evince unethical behaviour cannot expect their employees to behave according to high ethical standards
- E.g.: Sir Philip Green and BHS sale
o BHS sold for £1, pension funds short £350m
o Sir Philip still has his £100m yacht
What is the importance or example setting in corporate ethics
- When conflicting situations arise the lofty rhetoric in laudatory ethical behavior statements by senior management will only have true meaning and serve as guides to actions if employees observe senior managers acting according to the statements
- In this way, employees learn that the company’s stated beliefs represent deeply rooted and actionable values
- Prominent examples of where employees have been betrayed by the unethical conduct of senior managers are Carillion and Independent Insurance
What is an example of bad corporate ethics (Carilion)
- Large construction company – second largest in the UK
- Reported profit in 2016 of £235.9m
- 43,000 employees worldwide
- Liquidation January 2018
- Questions about conduct of directors and auditors
- Parliament orders investigation of directors for possible misconduct
- Directors summoned before House of Commons Work and Pensions Committee on 6 Feb 2018
- Possible pension deficit of £800m- £2.6b
- Directors called ‘deluded’
What is the role of formal statements of ethical standards
- They are meant to guide the behaviour of individuals by providing a strong point of reference for deciding on the appropriateness of behaviour.
- They provide the means to evaluate behaviour
- They proclaim the intentions of firms
How can ethics be incorporated into Management Accounting Systems Design
To incorporate ethical principles into the design of a MACS and help managers deal effectively with the ethical pressures, system designers might attempt to ensure the following:
1. That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics (often accomplished through the organization’s beliefs system)
2. All employees understand the organization’s code of ethics and the boundary systems that constrain behaviour
1. Boundary systems are designed to specify what actions are appropriate and those that must never be taken
2. A system to detect and report violations of the organization’s code of ethics
Why is ethical behaviour a concern for management accountants
- Management accountants ultimately are answerable to the public for their work.
- The public interest must override all other considerations should the management accountant be faced with a situation in which they are asked to behave unethically.
- Management accountants often will find themselves in situations where they may be asked to do something or agree with something which offends their sense of right and wrong and contradicts their professional codes of conduct.
- Management accountants may be especially under pressure to manipulate the information in accounting reports when the remuneration of senior managers is tied to the share price which is sensitive to reported earnings eg Enron.
How can ethical considerations be used to guide the behaviour of management accountants?
- Every business in every industry, although confronting many similar situations which give rise to ethical dilemmas, will be confronted with very specific or even unique problems that cannot be easily accommodated by a list of prescriptions.
- In most cases, there must be considerable reliance on the individual’s innate principles of ethical behaviour and professionalism.
- The manner in which individual management accountants react to pressure to falsify or distort accounting information will reflect their own belief systems, the example set by senior management and the demands of their profession
Ethics and the Management Accountant: Pressures from Senior Management
- Senior executives whose incentive compensation is based on the reported financial numbers may put pressure on accountants
o To recognize revenue from a customer early
o To defer until subsequent periods the recognition of an expense
o In some circumstances, to recognize certain expenses early so that much higher earnings may be reported in future periods - All of these behaviors were evident in the frauds dominating the financial news in recent years
- Organizational leadership plays a critical role in fostering a culture of high ethical standards
