Ethical Standards for Management Accountants Ethics in any industry is important, but for Accounting professionals and those in need of their services, it is a particularly stressed element.
Information provided by accountants is used to make major decisions, including investing, downsizing, expanding, etc, so accountants are expected to be competent, reliable, and have a high degree of professional integrity. Because of these high expectations, the professional accountancy industry, like many other professions, has adopted professional codes of ethics (Woelfel, 1986).These ethical codes go above and beyond the requirements for state or federal laws and regulations. There are several professional organizations within the accounting industry that have adopted a code of ethics for their specific field of accounting.
For example, the National Institute of CPAs has instituted the “Code of Ethical Conduct” that sets forth ethical standards and rules of conduct for its members. Also, the Institute of Internal Auditors (IIA) has a Code of Ethics that applies to its members and to Certified Internal Auditors.However, the focus of this paper will be on the ethical standard for Management Accountants, which has been set forth in the Institute of Management Accountants (IMA) Standards of Ethical Conduct. The vast majority, approximately 80%, of accountants and financial professionals work inside businesses and organizations – not in public accounting firms. Therefore, ethical standards play a huge role in the financial reporting of organizations around the world.
According to the IMA, the roles and responsibilities of management accountants include the following: • Managing functions that are critical to business performance Supporting organizational management and strategic development • Provide accurate and insightful information for better decisions • Ensuring the organizations operate with integrity and proper governance • Planning for long-term and helping to ensure sustainability • Safeguarding the interests of the organization and its key stakeholders The IMA Statement of Ethical Professional Practice includes five main areas and notes that those who choose not to comply with these standards could have disciplinary action brought against them. The five main topics are: • Competence • Confidentiality • Integrity • Credibility Resolution of ethical conflict Further detail regarding the items above can be found on the IMA website (www. imanet. org).
At the heart of all these efforts for ethical standards is a desire to deter and detect fraudulent activities within the accounting world. It is important to remember that the worst of the financial scandals of the past decade had at their core fraudulent activities that went undetected or undeterred by auditors, by boards of directors, and, sometimes, top management. As a result, all of these groups as well as accounting personnel have been challenged to enhance their behavior and to increase their vigilance.With less than 17,000 public companies in the United States compared to more than 22 million private companies, the number of accountants supporting the financial reporting of private companies claims the majority. However, the financial reporting requirements for private companies are much less than public companies. A private firm does not have to report annual earning to the U.
S. Securities and Exchange Commission. Nor does it have to provide a listing of all its assets and security holdings. This reduction in paperwork and filing requirements allows a private firm to keep a minimal number of financial accountants on the payroll.Also, since private companies do not fall under the 2002 Sarbanes-Oxley Act, private companies do not have the threat of fines or government scrutiny hanging over its chief executive officer though fraud is still illegal. All these items can lead to a greater possibility of financial fraud within private organizations.
According to Daniel F. Dooley (2008), a member of the Commercial Fraud Taskforce, financial fraud with private middle-market companies is on the rise. In fact, Mr. Dooley believes that he has seen more instances of fraud in the past two years than in the previous ten.He notes seven areas in which financial fraud has increased over the past few years: • Borrowing Base Calculations for an Asset Based Loan • Slow Processing of Accounts Receivable • Raw Material and Components are being Supplied by Customers • Short Payment of Accounts Receivable by Major Customers • Untimely Clearing of Checks Paying “Customer” Contras • Change in Inventory Valuation • Financial Statements Not Consolidated using Accounting Software On April 21, 2001, Lee Farkas, the former chairman of a private mortgage lending company, Taylor, Bean, & Whitaker (TBW), was convicted for his role in a more than $2. billion fraud scheme (Schoenberg, 2011).
This action contributed to the failures of Colonial Bank, one of the 25 largest banks in the United States, and TBW, one of the largest privately held mortgage lending companies in the United States. According to court documents and evidence presented at the trial, Farkas and his co-conspirators engaged in a scheme that misappropriated more than $1. 4 billion from Colonial Bank’s Mortgage Warehouse Lending division and approximately $1. 5 billion from Ocala Funding, a mortgage lending facility controlled by TBW. Farkas misappropriated this money to, among other things, cover TBW’s operating expenses.On October 31, 2011, a Reno man who worked as the chief financial officer for Securitron Magnalock Corporation, an electronic door lock manufacturer in Sparks, Nevada, plead guilty to embezzling approximately $2.
5 million from the company (FBI, 2011). This was accomplished by making false entries in the company accounting system to generate checks payable to a personal retirement account and by forging checks. Amy Cameron, from Washington, Oklahoma, was sentenced on July 14, 2011, to 30 months in prison for embezzlement from her employer and money laundering (The Norman Transcript, 2011).She worked for Quality Plumbing and Heating as a bookkeeper from 2006-2010.
Cameron issued checks payable to herself on the company’s bank accounts and deposited those checks into her own bank account and an investment account. Records indicate that she embezzled a total of $455,904. Due to these cases and other noteworthy financial fraud actions of recent years, the Accounting Standards Board adopted a new auditing standard for fraud titled SAS 99. This new auditing regulation is noted for both public and private companies.
It describes fraud as “an intentional act that results in a material misstatement in financial statements that are subject to audit”. Among other guidelines, it calls for auditors to, “develop a mindset that fraud can occur”. Auditors are required to discuss the risk of fraud and to invest more time in the planning stage. However, there is now a movement underway to lessen the financial reporting requirements for privately held companies (Defelice, 2010). According to the Private Company Financial Reporting Committee (PCFRP), there have been oncerns growing over the past decade due to gradual changes to the financial reporting requirements.
These requirements are viewed as a cause for concern because (Hepp & Illiano, 2011): • They are oriented toward the needs of financial analysts • They are expensive to implement and audit • They are based on a model of financial reporting that is not a good fit for private companies In November 2009, the PCFRP recommended that the Financial Accounting Foundation consider these issues in the context of the mission of the Financial Accounting Standards Board (FASB). This recommendation included the following statement: The Committee believes that a separate, stand-alone set of accounting standards for the U. S. private companies tailored to the needs of the users of those statements is the preferred approach. However, the Committee realizes there could be other major alternatives for private company accounting that should be explored. In establishing standards for private company financial reporting, the needs of financial statement users balanced against the costs of complying with the standard must be an overriding principle.
” The PCFRC also identified four events that support this review: The issuance of the International Financial Reporting Standard for Small and Medium-Sized entities • Efforts underway in other countries to address private company GAAP • Recent surveys of financial professionals in the United States that point to a preference for differing accounting standards for private companies • The increasing number of complicated accounting standards driven primarily by public company investor and analyst needs, which are costly. Less than a month later, the FAF announced the creation of a blue-ribbon panel to review these recommendations.After more than a year of review, the blue-ribbon panel submitted its recommendations in January 2011. The panel concluded that “there are urgent and growing systemic issues that need to be addressed in the current system of U.
S. accounting standard setting. ” Recommendations include, for the short term, “the system should focus on making exceptions and modifications to U. S. GAAP for private companies that better respond to the needs of the private company sector rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP (Conn, 2011).
The question arises, will modified financial reporting regulations for privately-held companies help in detecting and deterring fraudulent activities or will it only contribute to these efforts? Numerous individuals responded to the blue-ribbon panel (Lamorezus, 2011) with comments suggesting that lessoning the reporting requirements that are unnecessary for private companies will allow these companies to focus on reporting that does allow for full financial clarity, thereby, deterring the possibility for corporate fraud. Others, however, believe that reduced reporting requirements will only further cover fraudulent activities.The results remain to be seen. References Defelice, A. (2011, May 14). Panel expresses ‘broad –based concerns’ for private company financial reporting.
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accountingtoday. com Schoenberg, T. (2011, June 30). Ex-Taylor Bean chairman Farkas gets 30 years for $3 billion mortgage fraud. Bloomberg.
Retrieved from http://www. bloomberg. com The Association for Accountants and Financial Professionals in Business.IMA statement of ethical professional practice.
Retrieved from http://www. imanet. org The Federal Bureau of Investigation. (2011, May 17). Financial officer charged with embezzling over $2 million from Sparks door security company.
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