Ethics in Managerial Accounting

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  • 0:03 Managerial vs.…
  • 0:24 Ethical Violations
  • 0:51 Withholding…
  • 3:00 Competence / Conflicts…
  • 5:00 Code of Ethics
  • 5:33 Lesson Summary
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Lesson Transcript
Instructor: Anthony Aparicio

Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology

The function of managerial accounting is to provide information to key decision-makers within the organization. A high standard of ethical behavior is expected from those who develop this information.

Managerial Accounting vs. Financial Accounting

A financial accountant prepares financial statements and gathers information for use by people outside of the organization, such as investors, tax auditors, and shareholders. Managerial accounting information is developed specifically to provide managers with information they need to make business decisions within the company itself.

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.

Competencies in accountancy range from basic bookkeeping and communication, to problem solving and financial analysis. Skilled financial and managerial accountants will be able to recognize and deal with complex issues while being able to effectively communicate their findings to others in the organization.

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