5 2.5: Ethical Issues Facing the Accounting Industry

2.5: Ethical Issues Facing the Accounting Industry

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  • Contributed by No Attribution by request
  • Anonymous by request

 Learning Objectives 

  • Use standards of ethical conduct to resolve ethical conflicts facing accountants.

Imagine you are the accountant for Drive Write, a company that produces computer disk drives, and you are in charge of all accounting functions within the company. The president has informed you that if the company’s profits grow by 20 percent this year, you will receive a $20,000 bonus, and she will receive a $50,000 bonus. No bonuses will be awarded if profit growth is less than 20 percent. Because the company’s profits have grown 20 percent annually for the last 10 years, investors have come to expect significant growth from one year to the next. Near the end of this fiscal year, the president and you have the following conversation:

President: We are awfully close to hitting our numbers and getting to the 20 percent target. With two weeks remaining, projections show we will come in at 18 percent for the year. What can we do on the accounting side to increase current year profits?
Accountant: Well, I’m not sure there is anything we can do. Our accounting is squeaky clean, as confirmed by our independent auditors. Perhaps our sales will improve next year.
President: There has to be something we can do—I could sure use the bonus money, and our investors would appreciate an increase in their investment! I know we have a large customer order to be filled the first week of next year. Why not include that sale in this year’s numbers?
Accountant: I’m not comfortable recording sales in the wrong fiscal year.
President: We’re only talking about moving sales by a few days! I would like you to consider this carefully. If you can’t do this, I may have to find an accountant who can! Let’s talk about our options later this week.

Question: The situation at Drive Write creates a serious ethical dilemma. (The Drive Write example is based on a real company called MiniScribe Corporation, subsequently purchased by a competitor.) Companies are constantly under pressure to meet sales and profit goals. Employees who succeed in meeting these goals often reap huge monetary rewards; those who fail may be penalized with lower pay or may even lose their jobs. What would you do if asked to record information in a way that distorts the company’s financial results?

To help guide accounting professionals through ethical dilemmas like the one at Drive Write, the Institute of Management Accountants (IMA) has established a Statement of Ethical Professional Practice, which appears in Figure 2.2. The standards outlined in this statement are guidelines that can help accountants choose an ethically acceptable course of action. As you review Figure 2.2, notice that the IMA specifies four core responsibilities (competence, confidentiality, integrity, and credibility) as well as guidelines on how to resolve ethical conflicts. The “Resolution of Ethical Conflict” section provides specific guidance on how to resolve the conflict at Drive Write.

IMA Statement of Ethical Professional Practice

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

Principles

IMA’s overarching 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

A member’s failure to comply with the following standards may result in disciplinary action.

I. Competence

Each member has a responsibility to

  1. Maintain an appropriate level of professional expertise by continually developing 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.
  4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

II. Confidentiality

Each member has a responsibility to:

  1. Keep information confidential except when disclosure is authorized or legally required.
  2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.
  3. Refrain from using confidential information for unethical or illegal advantage.

III. Integrity

Each member has a responsibility to:

  1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of potential conflicts.
  2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
  3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

Resolution of Ethical Conflict

In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced with significant ethical issues, you should follow your organization’s established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action:

  1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If you immediate superior is the chief executive officer or equivalent, the acceptable review authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior’s knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of law.
  2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action
  3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Figure 2.2 – IMA Statement of Ethical Professional Practice, Source: Adapted from the Institute of Management Accountants, http://www.imanet.org.

Question: The IMA is just one of many professional accounting organizations. Do other professional accounting organizations also provide guidance regarding ethics in accounting?

Because of alleged wrongdoing, such as that reported in “Business in Action 2.3 and 2.4”, improving ethics is a top priority for most businesses. As a result, professional organizations like those we have cited have become instrumental in providing ethical guidelines.

Business in Action 2.3: Production Firm Employees Charged with Fraud 

The Securities and Exchange Commission (SEC) filed three actions against Diebold, Inc., a manufacturer and seller of automated teller machines, for improperly inflating earnings over a five-year period. Three former employees—the CFO, controller, and director of accounting—were accused of improperly inflating revenue on factory orders, improperly recognizing revenue on a lease transaction, manipulating reserves and accruals, improperly capitalizing expenses, and improperly increasing the value of inventory. These actions allegedly resulted in over 40 misstated annual, quarterly, and other reports filed with the SEC, along with numerous inaccurate press releases.

The company agreed to pay a $25,000,000 civil penalty, and the three former employees remain in litigation. Although the CEO was not accused of wrongdoing, he settled with the SEC and agreed to pay back cash bonuses, stock, and stock options received during the periods when the financial fraud was committed.

Source: Securities and Exchange Commission, “SEC Charges Diebold and Former Executives with Accounting Fraud,” news release, June 2, 2010.

Business in Action 2.4: The Code of Ethics at Home Depot and Hewlett-Packard 

Ethics policies are becoming increasingly important to organizations. Home Depot, Inc., has an ethics code that “provides the basic principles for associates to make business decisions consistent with how Home Depot operates” and “forms the groundwork for our ethical behavior.”

Hewlett-Packard Company has established “business ethics guided by enduring values.” The company states it is committed to the following principles: honesty, excellence, responsibility, compassion, citizenship, fairness, and respect.

Sources: Home Depot, “Home Page,” http://www.homedepot.com; Hewlett Packard, “Home Page,” http://www.hp.com.

 Key Takeaway 

Should you encounter ethical conflicts during your career, use the resources provided by internal company policies, by professional organizations such as the IMA and AICPA, and by governmental organizations such as the SEC as a guide to ethical behavior and the resolution of ethical conflicts.

Review problem 2.4

  1. Describe the four key standards of ethical conduct for IMA members outlined in Figure 2.2.
  2. What steps does the IMA recommend for resolving ethical conflicts?
  3. Using Figure 2.2 as a guide, discuss your options as the accountant at Drive Write.

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