Professional Ethics

Learning Objective 7 Understand what professional ethics mean to management accountants

In the early 2000s, the ethical conduct of managers came under scrutiny when investors and government regulators discovered that several companies had falsified financial statements to make themselves appear more profitable than they actually were. These companies included Arthur Andersen, a public accounting firm; Countrywide Financial, a home mortgage company; Enron, an oil and gas company; Lehman Brothers, an investment bank; Toshiba, a Japanese conglomerate; and Bernie Madoff Investment Securities have seriously eroded the public’s confidence in corporations. All employees in a company must comply with the organization’s—and more broadly, society’s—expectations of ethical standards.

Ethics are the foundation of a well-functioning economy. When ethics are weak, suppliers bribe executives to win supply contracts rather than invest in improving quality or lowering costs. Without ethical conduct, customers lose confidence in the quality of products produced and become reluctant to buy them, causing markets to fail. Prices of products increase because of higher prices paid to suppliers and fewer products being produced and sold. Investors are unsure about the integrity of financial reports, affecting their ability to evaluate investment decisions, resulting in a reluctance to invest. The scandals at Ahold, an international supermarket operator, and Tyco International, a diversified global manufacturing, company make clear that value is quickly destroyed by unethical behavior.

Institutional Support

Accountants have special ethical obligations, given that they are responsible for the integrity of the financial information provided to internal and external parties. The Sarbanes–Oxley legislation in the United States was passed in 2002 in response to a series of corporate scandals. The act focuses on improving internal control, corporate governance, monitoring of managers, and disclosure practices of public corporations. These regulations impose tough ethical standards and criminal penalties on managers and accountants who don’t meet the standards. The regulations also delineate a process for employees to report violations of illegal and unethical acts (these employees are called whistleblowers).

As part of the Sarbanes–Oxley Act, CEOs and CFOs must certify that the financial statements of their firms fairly represent the results of their operations. In order to increase the independence of auditors, the act empowers the audit committee of a company’s board of directors (which is composed exclusively of independent directors) to hire, compensate, and terminate the public accounting firm that audits a company. To reduce their financial dependency on their individual clients and increase their independence, the act limits auditing firms from providing consulting, tax, and other advisory services to the companies they are auditing. The act also authorizes the Public Company Accounting Oversight Board to oversee, review, and investigate the work of the auditors.

Professional accounting organizations, which represent management accountants in many countries, offer certification programs indicating that those who have completed them have management accounting and financial management technical knowledge and expertise. These organizations also advocate high ethical standards. In the United States, the Institute of Management Accountants (IMA) has issued ethical guidelines. Exhibit 1-7 presents the IMA’s guidance on issues relating to competence, confidentiality, integrity, and credibility. To provide support to its members to act ethically at all times, the IMA runs an ethics hotline service. Members can call professional counselors at the IMA’s Ethics Counseling Service to discuss their ethical dilemmas confidentially. The counselors help identify key ethical issues and possible alternative ways of resolving them. The IMA is just one of many institutions that help navigate management accountants through turbulent ethical waters.

Exhibit 1-7

Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management

Exhibit details the standards of ethical behavior for practitioners of management accounting and financial management.

The details of the statement of ethical professional practice are:

Members of IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles that express our values and standards that guide member conduct.

Principles: IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.

Standards: IMA members have a responsibility to comply with and uphold the standards of Competence, Confidentiality, Integrity, and Credibility. Failure to comply may result in disciplinary action.

  1. Competence:

    1. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills.

    2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.

    3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and help manage risk.

  2. Confidentiality:

    1. Keep information confidential except when disclosure is authorized or legally required.

    2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance.

    3. Refrain from using confidential information for unethical or illegal advantage.

  3. Integrity:

    1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest.

    2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

    3. Abstain from engaging in or supporting any activity that might discredit the profession.

    4. Contribute to a positive ethical culture and place integrity of the profession above personal interests.

  4. Credibility:

    1. Communicate information fairly and objectively.

    2. Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

    3. Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

    4. Communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Source: IMA Statement of Ethical Professional Practice, 2017. Montvale, NJ: Institute of Management Accountants. Reprinted with permission from the Institute of Management Accountants, Montvale, NJ, www.imanet.org.