Ethical Implications of Decisions

Question 1: How has the Institute of Management Accountants (IMA) responded to the need for higher standards of ethical conduct?
Answer 1: The IMA has issued a statement entitled Standards of Ethical Conduct for Management Accountants and publishes a monthly journal, Management Accounting. It presents a structure of guidelines based on the following key areas:
• Competence: Maintain a professional level knowledge by continuing education.
• Confidentiality: Only disclose confidential information when authorized to do so.
• Integrity: Avoid conflicts of interest and supporting any activity that would discredit the profession of managerial accounting.
• Objectivity: Communicate information fairly and objectively and disclose fully all relevant information for decision making managers.
Question 2: If faced with an ethical decision, who do you go to for help?
Answer 2: The ethical conduct of a corporation is guided by top management. A corporate code of conduct is the set of rules that guide all employees. It must be written, communicated, and strongly enforced to all employees. Most large companies have well-developed training for all employees regarding the code of conduct and ethics and an employee or group of employees that a person can go to if help is needed to resolve an ethical question or decision.
Question 3: How does the Sarbanes-Oxley Act relate to the ethical implications of decision making?
Answer 3: The Sarbanes-Oxley Act of 2002 established an oversight board for public accounting firms, set up new rules for independent auditors, enhanced rules for corporate responsibility in financial reporting, further defined disclosure of financial information, addressed conflict of interest, and enhanced fraud accountability and punishment for white-collar crime.
Question 4: Is the following decision ethical? If not, what standards of ethics did the accountant violate?
Answer 4: The financial accountant has sent the following income statement to corporate for the quarter-end reports and filing with the Securities and
Ethical Implications of Decisions

Exchange Commission (SEC). A mistake was made in reporting the expenses. The G, S, $ A expenses are understated by $5,000, causing the income before taxes to be over stated by $5,000. The accountant decides to not tell anyone and just correct it in the next accounting period.
The Purse Manufacturing Company

The decision to not tell anyone was unethical. The decision to report the error in the next accounting period may or may not be ethical, but it is not the accountant’s decision to make. The accountant should have reported the mistake to his superior. The superior and upper management would decide if the correction can be made in the current or the next accounting period.
The accountant violated the following standards of ethics:
• Competence to prepare complete and clear reports
• Integrity of communicating information
• Objectivity of failing to disclose fully all relevant information
Question 5: Based on the following information, what level of ethical standards does this accountant follow?
Answer 5: The accountant, working in Plant A, put together the following analysis knowing that if Plant A does not get the new product line, the plant may be closed and jobs would be lost, including the accountant’s job. Based on the following analysis, the accountant recommended that Plant B would be the lower-cost plant for sourcing the new product line. This information was supplied to the corporate offices under the strictest of confidence.
Ethical Implications of Decisions

The accountant complied with the highest of ethical standards by putting together factual information regarding the placement of a new product line considering that, based on this analysis, the accountant’s job and many others at Plant A may be in jeopardy.
The accountant complied with the following standard of ethical conduct:
• Competence: Prepared a complete and clear report with recommendations and appropriate analysis
• Confidentiality: Did not disclose this information to others in Plant A
• Integrity: Avoided actual conflict of interest
• Objectivity: Communicated information fairly and objectively
Question 6: Should an accountant tell the customer about a competitor’s better price?
Answer 6: The managerial accountant was given a request from a very good customer to quote on a product. After telling the customer the price, the customer said he could not afford it at that price. The accountant knew of a competitor willing to supply the customer with the product at a cheaper price.
It is not the accountant’s responsibility to give out that information. If it is given out at all, it should be the decision of the sales and marketing department. That knowledge is confidential information the accountant gains through performance of his job. Giving out that information would be a violation of confidentiality and integrity. There could be a conflict of interest on the part of the accountant.
Ethical Implications of Decisions

Question 7: How does having a good understanding of analysis and ratios support the Standards of Ethical Conduct?
Answer 7: Understanding vertical and horizontal analysis and financial ratios can give managers, management accountants, and investors the knowledge and information to question any analysis or ratio that seems out of line with other known information about the company or the industry in which the company operates.
Had these analyses and ratios been reviewed in 2000, the scandal discussed by Reinstein & Weirich (2002) would have been uncovered long before the company claimed bankruptcy in 2002. Consider the following questions from Reinstein & Weirich (2002):
• Why would [this company’s] 2000 revenues increase 151% and cost of sales increase 172% while its stock price doubled?
• Why did revenues increase significantly? Were these increases sustainable?
• Why did gross margin dollars only slightly increase when sales increased 151%?
• Why did gross margin percentages drop from 13.3% to 6.6%?
• Given its market dominance, why was [this company’s] return on capital 7%?
Question 8: What ethical considerations are involved in a manager’s decision to not replace equipment?
Answer 8: A managerial accountant has put together the following information relative to the decision to replace an old piece of manufacturing equipment. Based on this information, the department manager decides not to replace the equipment because of the negative impact it will have on his 2006 bonus.

The ethical misconduct of the manager was his integrity. The conflict of interest he had between his bonus and the long-term company benefit demonstrated his lack of integrity.
The managerial accountant should discuss this issue with the manager and explain the cost savings of the project. He could suggest that the analysis be reviewed by upper management before the decision is finalized. If possible, he could go to the administrator of ethical conduct. Not doing this would be a compromise of his competence and objectivity.
Question 9: How would spreading the cost of equipment over 15 years rather than 10 years affect the analysis?
Answer 9: The 15-year life of the equipment reduces the yearly depreciation from $4,500 ($45,000 / 10 years) to $3,000 ($45,000 / 15 years), a reduction of $1,500 per year. This improves the profit of the department by the same amount, $1,500 each year. It improves the internal rate of return (IRR) from 5% to 10% for the first 10 years of life.

The department manager wanted to increase the profit of his department to increase his bonus. This violates the integrity standard of conduct. The manager’s desire to maximize his bonus and not being realistic about the life of the new equipment is a conflict of interest.
Question 10: In an accounting department, what should be done to ensure that accountants adhere to the Standards of Ethical Conduct?
Answer 10:
• The standards should be given to each accountant.
• The standards should be posted in an accessible area.
• Regular training and meetings should be scheduled to make sure these standards are being followed.
• A periodic review of each accountant’s work should be completed to make sure it complies with the standards.
• An ethical standards board or group should be setup so that everyone has someone to go to for guidance and support.
Reference
Reinstein, A., & Weirich, T. R. (2002). Accounting issues at Enron. Retrieved January 6, 2010, from the CPA Journal Web site: http://www.nysscpa.org/cpajournal/2002/1202/features/f122002.htm