Question

Since managerial accounting does not follow strict reporting requirements like financial accounting, do you see any ethical issues that may arise? Should there be specific reporting requirements?

Answer 1

Ethical Violations in Managerial Accounting

Ethical violations can have far reaching consequences for an organization. At the very least, they prevent managers from making sound business decisions. Larger ethical violations have caused entire organizations to shut down and people to go to jail for their participation.

Ethical violations in managerial accounting commonly fall into four major categories. They include:

• Withholding information
• Misleading information
• Competence
• Conflicts of interest

Withholding Information

Let's begin by looking at our first example, withholding information. Not many people enjoy being the bearer of bad news. In some cases, it may be okay to keep negative information to yourself; however, financial professionals must disclose all information, both positive and negative. Managers rely on the advice and reports they receive from accountants. In some cases, there may be reasons for negative information that the managers already know about and are expecting.

For example, if your division makes a major investment into a new company, there will be a lot of additional expenses during that reporting period: the equipment itself, lost time during the transition, training, etc. Other times, there may be things going on that the manager does not know about but needs to research in order to maintain an efficient and effective work environment.

Misleading Information

Now we'll look at how misleading information can violate managerial accounting ethics. If an accountant understands that it is unethical to withhold information, he or she may attempt to mislead others to make it appear that things are better (or worse) than what they really are. This may take the form of communicating the information in a way that makes it seem different than what it actually is. Another form of misleading information is when someone utilizes different methods to compute the data for reports.

Accountants have specific rules that keep them from changing the method of computing data for reports because it can have a large impact on their profitability reports, including net profits. For example, when computing inventory value, there are at least three different methods to determine the value of inventory held by the company. One is called first in, first out (or just abbreviated as FIFO). The second is called last in, first out (or LIFO). Finally, there's weighted average valuation. If a report should be made using LIFO but the accountant changes it to FIFO, it can make net income appear larger because the value of the inventory increases and the lowest costs were allocated to goods that have already been sold.

Competence

Now we'll look at issues of competence. Rules and laws in accounting are constantly changing, especially the Internal Revenue Service's tax laws. Financial professionals need to ensure that they are keeping current with all relevant updates to those laws as they apply to their organizations. Additionally, any reports that are generated should provide a professional analysis of the information so that managers can use them to make positive changes within the company.

Yes, there should be a proper set of standards to mitigate all the above mentioned risks. And even some boards are offering some standards in few countries like India.