The Institute of Management Accountants (IMA) defines professional ethics in accounting as the strict adherence to a code of conduct in the practice of accounting. In its code of ethics, the IMA requires managerial accountants to uphold professional ethics. Therefore, managerial accountants must demonstrate high levels of honesty, objectivity, confidentiality, and expertise in their practice (IMA 1983).
To combat unethical accounting methods, Fisher and Rosenzweig (1995) harshly criticized academics' restricted concentration on teaching professional code of conduct in accounting practice. He stated that the accounting academic community should mobilize sufficient resources to identify teaching strategies. In line with their theory, they asserted that when students lack ethical academic fundamentals, they are unable to apply critical thinking skills to professional ethical challenges, which is a detriment. Such ethical difficulties can be resolved when accounting programs acknowledge the significance of ethics and provide quality ethics courses (Fisher and Rosenzweig 1995).
Recent accounting scandals have been widely covered. This clarifies that the ethical behaviour of accounting managers falls short of the norms implicit in the preceding quotations. In its article titled "Scandal Scorecard," the Wall Street Journal provides an overview of accounting crimes (12 serious scams) involving publicly owned businesses. A greater proportion of the fraud in this piece involved the chief financial officer, the chief accounting officer, the controller, and numerous additional accountants employed by the enterprise. These scandals, among others, have demonstrated the need for controls. In 2002, the federal Sarbanes-Oxley Act (SOX) was enacted. The Public Company Accounting Oversight Board was established by this statute in an effort to supervise the conduct of public-practice managing accountants and those employed by publicly held businesses. It has been stated that, notwithstanding the aforementioned steps, there is still a need for a much stronger emphasis on simplifying professional ethics in accounting (Schipper 2009, Hamilton 2007, Schneider 1995).
Ethical Difficulties Confronting the Profession
Fraud in the form of intentional fraud and false financial reports, deception of users of financial statements through intentional misstatements or omissions of quantities or disclosures in financial statements are among the ethical difficulties facing the accounting profession (Corner 1986). False financial reports may involve manipulation, fabrication, or the alteration of supporting papers or account documents used to create financial statements (Leung and Cooper 1995, Healy and Whalen 1999, Chow et al. 1988). It may also involve manipulation of facts, the intentional exclusion of events or transactions from financial statements, or the improper application of accounting principles with regard to quantity, disclosure, or presentation style (Nouri 1994, Sayre et al. 1998).
Deception typically entails undue pressure or incentives and the perception of an opportunity to commit fraud. For instance, fake financial reporting may emerge if the organization's management is under pressure to meet unachievable profit goals (Sayre et al. 1998, Schneider and Sollenberger 2003). Other instances may involve fabricated documents, such as forgery and hiding errors by creating fictitious invoices. This can be accomplished through collaboration or personal motivation (Fox 1997, Schilt 1997, Hepworth 2009).
Professional Accountancy Bodies and Responses to Challenges and Codes of Ethics Enforcement
The International Federation of Accountants (IFAC), the American Institute of Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Institute of Management Accountants (IMA) are some of the most prominent professional accountancy organizations that work to enforce the code of ethics in managerial accounting (Schipper 2009). This section of the paper addresses, from a worldwide perspective, the professional accountancy organisations, activities taken to resolve difficulties, and enforcement of codes of ethics.
The 1919-founded Chartered Institute of Management Accountants (CIMA) is the largest organization for professional management accountants. Core activities include enterprises in sectors such as industry, commerce, nonprofits, and the public sector. CIMA collaborates directly with employers and sponsors high-level research, among other things. While carrying out its mission, the Chartered Institute of Management Accountants engages in constant updates of its qualifications, requirements for professional experience, and sustained professional development, which positions it as an employer of choice when recruiting professionally trained business leaders.
The CIMA is committed to upholding high, ethical, and professional standards in management accountancy and maintaining public confidence in managerial accounting processes. Its activities are geared on assisting its members, including professionals and students, to confront ethical difficulties during their practice (Schneider and Sollenberger 2003).
The Prince's Accounting for Sustainability and International Integrated Reporting Committee (IIRC) is an organization that engages in and focuses on management information as a fundamental prerequisite for the development of better reporting mechanisms in the corporate arena. Its activities are governed by the belief that standard accounting records and reports tend to emphasize a company's short-term performance. Their interest may expand to include the long-term viability of the business model and the social and environmental repercussions of the organization (Horngren etal. 2002). The Accounting for Sustainability (A4S) program is another initiative in which CIMA seeks to establish a model that is interconnected and integrated in terms of reporting characteristics. CIMA (Chartered Institute of Management Accountants) is better positioned in terms of gathering and presentation of critical data, the majority of which is fundamental to information management activities, which is a standard CIMA activity. Consequently, the CIMA code of ethics mandates the objective, responsible, and impartial presentation of accounting information, independently of the intra- or extra-organizational pressures that may seek to falsify accounting facts or information deemed disagreeable to them (Schneider and Sollenberger 2003, Zimmerman 2000).
IIRC was founded with a worldwide network agenda. It is a collaborative effort of accounting institutions, corporate governance experts, and standard-setters that focuses on business sustainability and ethical accounting practices. However, there is no defined global standard for measuring environmental, governance, and social performance. The IIRC attempts to address ethical concerns and ensure the code of ethics is enforced through activities such as responding to concise, clear, comparable, and comprehensive reporting frameworks that are integrated and structured in accordance with the organization's strategic objectives, business model, and governance by managing financial and non-financial material (Schneider and Sollenberger 2003). Initiatives such as the Global Reporting Initiative (GRI), a network-oriented organization recognized with pioneering an internationally utilized sustainability reporting framework, are being employed to solve ethical concerns. Moreover, the GRI's operations are supported by a commitment to continual global application and improvement. GRI framework sustainability reports have been widely utilized in areas requiring a demonstration of organizational commitment to sustainable development, periodic comparison of organizational performance, and areas with applicable codes, standards, or legislation (Schneider and Sollenberger 2003).
Organization for Economic Co-operation and Development Multinational Enterprise Guidelines: These are government recommendations to multinational firms outlining voluntary ethical principles and standards in the areas of the environment, human rights, bribery, consumer interests, information disclosure, competition, taxation, and science and technology. These have proven to be more comprehensive principles, particularly for modern corporate responsibility, which safeguard governments against unethical practices in a multilateral manner (Schneider and Sollenberger 2003).
United Nations Principles for Responsible Investment (PRI): Environmental, Social, and Corporate Governance (ESG) problems have an impact on investment returns, and this is causing the investment profession to be increasingly concerned. To address this issue, the PRI portfolio establishes a framework to assist investors in evaluating the aforementioned variables of significance to them. Although the principles are not prescriptive, they describe measures that can monitor the incorporation of environmental, social, and governance (ESG) concerns into major investment, decision making, and ownership. The use of the aforementioned principles reduces unethical activities since they result in a greater alignment between society goals and those of institutional investors, hence generating long-term financial returns that benefit all stakeholders (Schipper 2009, Dechow 2000).
Ethical Issues Facing Accounting Managers and Behavior Monitoring
Replacement of Existing Assets – Similar to estimation of comparable units, replacement of existing assets requires investment decisions where return on investment is employed as a performance metric. Under these conditions, the volume of an organization's assets is defined in terms of their book value and the return on investment's denominator. A recommendation for a corporation to invest in machinery, for instance, is beneficial in the long run. However, this would diminish the participant's current rate of investment because the acquisition of new machinery is more expensive than the expenditures associated with maintaining existing machinery and technology (Merchant 1990, Rogerson 1992)..
According to Horngren et al. (2002), managers have a tendency to maximize return on investment or residual income since they "desire a low investment base. Managers of companies utilizing net book value tend to hold on to depreciated assets. (Horngren et al. 2002, p. 415-6). In addition, the potential that net book value may initiate an upward trend that is deceptive regarding return on investment has immediate and severe implications for investment-focused managers and their investments (Hilton et al. 2000). The investment centers with fewer assets demonstrate a greater return on investment than those with relatively fresh assets. Consequently, this is likely to deter investment center accounting managers as they are prevented from purchasing new technology (Hilton et al. 2000, p. 844). This is consistent with Kaplan and Atkinson's claim that many accounting managers cannot be expected to manipulate the transparency of their return on investment. However, they can increase their return on investment metrics by continuing operations with virtually or totally depreciated assets and by pursuing new investment possibilities in assets (Kaplan and Atkinson 1998, p. 518).
As shown in the preceding examples, overproduction is prevalent. The urge to affect the company's earnings can influence accounting managers' judgments. Advocates of absorption costing (full costing) have stated that managers are more likely to manipulate net income because unit costs can be cut by expanding production and fixed overhead is a product of the cost of goods sold (Kaplan and Atkinson 1998). In addition, Zimmerman (2000, p. 496) states, "Managers whose compensation is based on total profits calculated using absorption costing can increase reported profits by increasing production" (if sales are held constant). The most significant critique of absorption costing is that it generates incentives for managers to overproduce, hence increasing inventories (Zimmerman 2000, p. 496).
According to Horngren et al. (2002, p. 609), if a business employs the absorption costing method, a manager may be motivated to generate superfluous units to improve reported operational revenue. This is best stated by Kaplan and Atkinson (1998, p. 504), who provide a circumstance in which "the division manager had significantly increased production in the second and third quarters, resulting in an accumulation of excess finished goods inventory." Significantly increased production rates allowed period costs to be absorbed by inventory." Therefore, concerns arising from overproduction may have direct or indirect ethical implications for the company and its accounting managers (Kaplan and Atkinson 1998, p. 504).
In a conflict of interest, persons with self-serving motives utilize their official position to achieve inappropriate benefits. In order to earn greater performance bonuses, a management accountant may participate in unethical actions such as overstating the pretax incomes of the corporation. Similarly, he may engage in insider trading in an effort to minimize losses or purchases or sales of the organization's securities. In the Accounting and Auditing Enforcement Release (AAER) 344 (10 December 1991), for instance, a managerial accountant was denied the ability to practice accountancy in a publicly owned corporation due to alleged insider trading and $73,000 in loss evasion on the sale of the corporation's common stock. In three years, the victim reportedly conspired with senior management of the organization to inflate earnings by more than $38,000,000. (Nouri 1994).
Cost Allocation: According to Rogerson (1992), organizations who engage in contracts with cost-based revenues are likely to engage in unethical activity when allocating overhead costs. Therefore, cost allocation is the practice of adjusting cost allocations arbitrarily in order to increase revenue from cost-plus product sales. According to Schneider and Sollenberger (2003, p. 4-19), cost-basing and market-basing the prices of goods or services urge managers to shift overhead expenditures to those cost-based goods or services. According to Hilton et al. (2000), "cost-plus contracts incentivize the supplier of the goods or services to seek maximum reimbursement and to allocate maximum cost to the product for which reimbursement is possible." (Hilton et al. 2000, p. 375). This is best illustrated by the example of manufacturers who make conventional items for commercial customers on a fixed-price contract basis while manufacturing specialized goods for other customers on a cost-plus basis/under cost-plus contracts, resulting in increased income for such sectors (Horngren et al. 2003, p. 535).
Impact of Ethics on Businesses
In a study on the likelihood of participating in unethical activity, five subsamples of respondents were surveyed by Schneider and Sollenberger (2003, pp. 1–50). Four ethical dilemmas were addressed for each of the five subsamples, with 38% to 51% of respondents reporting the likelihood of participating in unethical action. The estimation of units was the sole ethical issue in our investigation that lacked an obvious conflict of interest. Ethical concerns such as overproduction, the replacement of existing assets and investments, and opposing interests illustrated the chance that accounting managers' judgments will conflict with those of the business. The ethical issue with cost allocation revealed a conflict of interest between the company's interests and those of stakeholders, such as the cost plus contractor. On the other hand, ethical issues involving estimation of equivalent units would result in occurrences such as overestimation, which would likely increase the organization's current earnings without posing serious consequences to its production and investment. A similar scenario would apply to ethical issues involving overproduction, replacement of existing assets and investment, and competing interests (Schneider and Sollenberger 2003, p. 1-50).
In terms of instilling ethical ideals in their careers, accountants' training plays a key role. According to Jennings (2004), accounting students should be required to take ethics courses due to the surge in unethical activities exhibited by accounting professionals, such as recent scandals involving Arthur Andersen, Enron, and WorldCom. In accordance with Schipper's advice, on-the-job training can be incorporated into the answer to the escalating trend of unethical behavior (Schipper 2009).
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