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Management Accountancy Issues and Professional Ethics

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Management Accountancy Issues and Professional Ethics

Introduction

According to Buchman (2005), professional ethics are norms that guide decision making in a given field. The decisions include those touching on transactions and maintaining an appropriate relationship with the public as well as within the professional field itself. The professionals have an obligation not to harm their clients. The definition of professional ethics also touches on rules that provide boundaries on the code and conduct of those who participate in the professional field (Chow &Cooper 2008).

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Professional ethics are to be found in many fields including nursing, teaching, law and many others. The author of this paper will focus on professional ethics in one of these professional fields. The author will focus on accounting ethics before addressing issues emanating from management accountancy as a profession in greater detail.

Ethics in Accounting

Ethics in accounting implies the making of sound judgments that are morally right based on accountancy. The history of ethics in this field can be traced back to the writings of Luca Pacioli, a proponent of ethics who addressed the need to implement ethics in accounting. He is regarded as the father of accounts (Buchman 2005). This was way back in1494 when he wrote several books regarding ethics in accounting. One of the books titled Summa de Arithmetica is regarded as the foundation on which ethics in accounting is built. From his writings, the field has expanded to include various governmental bodies and non- governmental organizations and companies which have recognized the need to impart skills and ethics to accountants and auditors (Dechow & Sloan 2001). For example, the American Association of Public Accountants is one of the bodies that have spearheaded efforts to protect the accounting profession. The individuals involved directly with the accounting services are supposed to adhere to the rules and regulations as per the association so as to gain trust from members of the public.

In contemporary society, accounting issues have emerged ranging from inadequate services to unethical standards leading to closure of some corporate companies. This has raised more questions than answers on why the accounting profession is losing ground (Rosenwald 2007). The answer to many of these questions was to establish ethical standards to be incorporated in the accounting profession. By doing this, unethical acts like fraud would not be tolerated leading to a dignified profession (Jackling, Barry, Leung & Dellaportas 2007).

Evaluation of the Importance of Professional Ethics in Accounting

Professional ethics are mandatory to those who work in the accounting field due to the fact that those who work within this sector need to uphold high ethical standards to gain trust from members of the public. Lack of professional ethics may compromise the quality of the services rendered and mislead the public (Stephens 2003). Accounting services are very important to many sectors in the society. They are needed to make informed decisions touching on investment and such other issues. For example governments need accurate accounts in order to plan for developments. In other words, different stakeholders need information provided by accountants to carry out some these activities (Young 2005).

Accountants have different roles to play in providing these services. In other words, there are many specialised roles for the accountant in this field. Some of them include auditing specialists who make sure that various transactions carried out are accurate. They also detect frauds, help in budget making and even provide financial advice to their clients (Williams & Elson 2010).

We realize the importance of ethics in the accounting profession at this juncture. Our attention is drawn to the formulation of the code of ethics in the profession. To this end, the author is going to address significance of these codes of ethics in management accountancy. The reason why the author makes reference to the code of ethics is that there is need to understand the regulations that guide the profession for the purposes of accountability (Healy & Whalen 2009).

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The codes of ethics can be referred to as the regulations made by governing body or any other independent body concerned with the monitoring of management accountancy. This is to make sure that the regulations are followed to the letter. The codes can also be expanded to include statements that define the principles and knowledge of the profession in a procedural manner (Hilton 2000).

Different countries have different ways of addressing the accounting profession. For example in Germany accounting is governed by tax law whereas in the United Kingdom the regulations concerning accounting are to be found in the country’s company law (Clikeman 2005). Therefore, the knowledge of accounting ethics is a requirement before one is admitted into the accounting field. Every accountant should adhere to the rules according to the laws in the country (Loeb 2009).

From this perspective, international bodies such as the International Federation of Accountants assume that accountants are found and practice in different countries thus the need for international recognition. The society depends on this highly recognized profession and there is need to come up with international law to regulate the standards of this profession across the world (Stevens 2002).

Principles of Management Accountancy

Integrity

This is what defines an individual working in a profession as required by the code of ethics. In this case, the professional accountant should be honest at all times and should not engage in activities that do not go well with the profession. Deviation from this is a symbol of ethical misconduct. This is for example taking bribes and providing dishonest financial accounts.

Objectivity

In this case, any one working in this field should not be driven by personal interests (Williams & Elson 2010). In addition, one should not be biased under any circumstances. All those working in this field should serve all clients equally without any favouritism based on personal relationship or other factors. This means that in making financial reports, the accountant should be as objective as possible.

Confidentiality

There is need to protect information accessed by accountants so that it is not accessed by unauthorised third parties. This is especially so given the fact that accountants come across very sensitive information regarding the company they are dealing with. This information can be devastating if disclosed to third parties. The relationship between businesses should be intact. Confidentiality becomes an important factor in all processes. Accountants should not use confidential information to their own benefit (Waller 2008).

Professional Competence

The services provided by a particular accountant should be in accordance with the required knowledge and skills. This service should be consistent throughout the profession. What this means is that the accountant should provide quality and professional services to the client. These are services that meet the standards in the field. If the services are altered in one way or another, the professional may be rendered incompetent (Schneider & Sollenberber 2003)

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Ethical Challenges Facing Management Accountancy

Disregarding ethical regulations in management accountancy has led to poor services leading to poor performance and low standards in the profession. The major challenges facing the industry include lack of transparency and proper governance structures. Those involved in the field are not accountable to their work (Seller 2001). To this end, the two challenges are degrading ethical performance in the field of management accountancy. It has denied the public a right to have access to their assets due to unaccounted financial statements. Issues like unaccountability and lack of harmonization are also contributing to the fading away of ethical conducts as far as professional accounting is concerned. International Federation of Accountancy as well as renowned scholars has provided various factors that have resulted into the decline in ethical standards internationally. These are as outlined below:

Self Interest

This factor compromises professional ethical conduct by those working in the industry. As a result of self- interest, individuals manipulate financial statements and progress reports to earn unworthy recognition. Other workers implement actions that favour their superior’s interests (Waller 2008). To this end, many employees have been rendered jobless after the closure of a given company due to improper financial accounts.

Inadequate Ethical Sensitivity

This is also a challenge in management accountancy. In this case, potential candidates do not exercise their ethical values as far as the profession’s ethics are concerned (Zimmerman 2000). Those ready to work in the field do not exhibit ethical conducts to serve in the profession. To add to this, few students are enrolling in this profession leading to lack of qualified professionals in the field (Waller 2008).

Inadequate Leadership and Improper Judgement

Poor leadership has led to inadequate planning as a result of failure to adhere to the ethical standards. Good leadership requires competence in every area of the profession. Failure to uphold this culture will lead to poor structures in the profession which requires a high calibre of ethical discipline (Loeb 2001). When it comes to passing judgements, wrong decisions are making the firm collapse. Large, medium sized and even small firms require solid judgments that will win public trust towards their operations.

Accounting Scandals

This is a common phrase we encounter in our day to day activities. The term gained popularity in the late 1980’s (Cheffers & Pakaluk 2007). During this period, companies had collapsed as a result of concealing information and only revealing it when it is too late. This was due to various unethical issues such as bribery, creative accounting among others (Hoffman 2006).

Misleading financial information is on the rise and this trend is denying investors the knowledge required to invest their money. A good example is the WorldCom which had violated ethical conducts by not revealing the actual accounts of its operations. Enron is another example of an accounting scandal that resulted to the loss of 85,000 jobs (Berton 2004). This was a multi-national company that failed to publish the actual figures of their financial statements plunging the company into problems with creditors and investors. The auditors and personnel in the finance department signed an invalid financial statement. The truth is that although only a few individuals got involved in the scandal, the whole work force in the company was affected.

Professional Bodies in Management Accountancy

Due to the increased cases of breaching of the code of conduct by most firms across the globe, there has been the introduction of international bodies that ensure that ethics as far as the management accountancy profession is concerned are adhered to (Dey & Dominiq 2009). This idea was triggered by frequent scandals reported by the media with constant ethical improprieties in the profession. Multi- national firms have collapsed due to misleading financial statements. The society has suffered as a result of this thereby losing trust in the accounting profession. Worst of all, the huge capital markets have been forced to halt their operations due to incompetence. Several international bodies have emerged to look into the matter but little effort has been made to fully address the issue and find a permanent solution (Kaplan & Atkinson 1998)

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The International Financial Reporting Standards (IFRS) is one of the international bodies lobbying for ethical standards to regulate the industry. It was instigated by the international accounting board. IFRS has operations in more than 115 countries including in the European Union and Australia (Nelsont, Elliott & Tarpley 2003). Such international bodies are involved in formulating rules that protect the consumer from being harmed by accountants flouting ethical codes of conduct. The rules are principle-based and this move is seen to be effective. This is due to the fact that the IFRS is able to impose severe penalties on those who breach the code of conduct and most importantly, providing advice to those facing serious challenges when dealing with their customers. Another important aspect of the IFRS is that it has come up with monitoring systems that ensure that the ethical standards are followed (Patrice 2003).

The main activities of the IFRS are influenced by two factors affecting their efforts in safeguarding ethical codes of conduct. First, there is comparability which is the process of comparing accounts and being accountable to different corporations for the sake of transparency. Secondly, they are based on relevance and reliability. In this case, customer’s trust is of great importance to every stakeholder (Horngren 2002).

The practice of upholding the international rules have not been implemented in all countries in the world. There is therefore the need to have all accountants across the globe adhere to these ethical standards. The effectiveness of the international bodies is reduced given the fact that they cover a small portion of the world’s accounting activities (Horngren 2003).

Response to Challenges and Scandals

There have been many activities carried out to assist in combating unethical behaviours among the accountants. The activities range from changes in the form of education offered in accounting schools (Casler 2004). Students aspiring to venture in this field are imparted with skills that enable them to deliver services of high quality. Moreover, companies as well as the regulatory bodies have made efforts to safeguard the profession’s integrity by making sure that educational materials are available for professors in the tertiary education institutions. This is to make sure that they produce highly qualified graduates willing to adhere to the ethical conducts.

Regulatory laws such as the Corporate Law Economic Reform Program Act 2004 and Sarbanes-Oxley Act 2002 in Australia and America respectively are intended to make sure that the right channels are followed in accounting (Rosenwald 2007). These include rules to be adhered to during accounting transactions in accounting firms as well as verification of accounting financial statements (Sellers 2001). For example, the Chicago Times newspaper reported unethical conducts in the Public Oversight Board (POB) but the regulatory bodies intervened and a new board (Public Company Accounting Oversight Board [PCAOB]) was formed to replace POB (Berton 2004).

Still on reforms, the President of the United States has signed various bills such as the Consumer Protection Act that touches on every area of management accountancy to protect the consumers from harm caused by unethical accountants (Bennett, Bradbury & Pragnell 2006). This has facilitated the activities of whistleblowers who act promptly when a firm is perceived to deviate from the stated norms (Stephens 2003). The whistleblowers identify a problem early enough so that the proprietors are held responsible and in so doing, less damage is caused to the consumers (Loeb 2009).

Conclusion

Ethical conducts in any field is an important factor that safeguards the rights of the public by making sure that professionals act within stipulated boundaries. Professional ethics should be taught in schools early enough so that those working in the profession adhere to the regulations put in place when they start working (Carey 2009). Harsh penalties should be meted out to punish those who breach ethical conducts to safeguard the profession’s integrity. This is for the good of the public as well as providing environment conducive for professional workers. If these measures are put in place with immediate effect, instances of unethical acts will be reduced (Hoffman 2006). Finally, there should be constant monitoring and evaluation of every accountant’s performance by independent bodies to detect any potential problems before they get serious. Through this, less damage will be caused to the firm and to consumers at large.

References

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Berton, L 2004, Advertising has hurt accounting ethics: Critics, Chicago SunTimes, May 24, pp A5 A4.

Buchman, TA 2005, The reliability of internal auditors’ working papers auditing, Auditing Journal of Practice &Theory, 14(4), 293-310.

Carey, JL 2009, Professional ethics of public accounting, New York, Arno Press.

Casler, DJ 2004, The evolution of CPA ethics: A profile of professionalization, Michigan, Michigan University Press.

Cheffers, M & Pakaluk, M 2007, Understanding accounting ethics, New York, Allen David Press.

Chow, CW & Cooper, JC 2008, Participative budgeting: Effects of a truth-inducing pay scheme and information asymmetry on slack and performance, The Accounting Review, 63(1), 111-122.

Clikeman, PM 2005, Educating the public trust, The CPA Journal, 73(8): 80.

Dechow, P & Sloan, RG 2001, Executive incentives and the horizon problem: An empirical investigation, Journal of Accounting and Economics,14, 51-89.

Dey, LR & Dominiq, J 2009, Auditors in the palm of the banks as Enron shareholders move against banks, The Times, January 25, 9 A4.

Healy, PM & Whalen, JM 2009, A review of the earnings management literature and its implications for standard setting, Accounting Horizons,13(4), 365-383.

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Hoffman, MW 2006, The ethics of accounting and finance: Trust, responsibility, and control, Westport, CT Quorum Books.

Horngren, CT 2002, Introduction to management accounting. London, Prentice-Hall.

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Jackling, B Barry, JC Leung, A & Dellaportas, V 2007, New York’s professional accounting bodies’ perceptions of ethical issues, causes of ethical failure and ethics education, Managerial Auditing Journal, 22(9), 928–944.

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Rosenwald, MS 2007, Extreme makeover, The Washington Post, September 10, pp A1 A4.

Schneider, A & Sollenberber, H 2003, Incidence of accounting irregularities: An experiment to compare audit, review, and compilation services, Journal of Accounting and Public Policy, 3(1), 92-103.

Seller, JH 2001, Accounting student perceptions of business and professional ethics, Mississippi, University of Mississippi.

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Stephens, R 2003, Enron shareholders move against banks is rebuffed by Judge, New York Times, pp12 A7.

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Waller, WS 2008, Slack in participative budgeting: The joint effect of a truth-inducing pay scheme and risk preferences, Accounting, Organizations and Society, 13(1), 87-98.

Williams, J & Elson, R 2010, Improving ethical education in the accounting program: A conceptual course, Academy of Educational Leadership Journal, 14(4), 107-116.

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