Assessing and Determining the Ideal Ethical Considerations - Case Study Example

The Ethical Considerations in Management Accounting, Review Of Theoretical and Practical Foundations

Abstract

This paper focuses on assessing and determining the ideal ethical considerations that ought to be used as guidance by professionals in management accounting. The core study drivers are founded on the issues of clear reporting standards, transparency, accountability, and practicing responsible professionalism. Assessment of an individual's motivation is the additional integral attribute that comes up when determining whether to act or not to act ethically. Organizations have a major role in the promotion of ethical conduct in their employees. This paper aims to discuss the ethical issues in accounting by applying various theoretical frameworks to forward financial accountability in organizations. The paper provides recommendations on the ethical considerations established in the present case to promote ethics in the management accounting profession.

Keywords: accounting, Ethical accounting, Ethical dimensions, ethical decisions, utilitarianism, ethical motivation, and management accounting

Introduction

Ethical issues in accounting have become a challenge to the contemporary business world. Accounting is the backbone of any organization, and if it is not managed, well organizations are inclined to go bankrupt. It is the accounting department that informs the management of an organization on decision-making. Unethical operations in the accounting department have seen so many organizations close their doors because of accountants who have questionable financial accountability morals.

The financial challenges that organizations face are a result of irresponsible handling of money by the accounting department. Responsible accounting is mandatory for the growth of an economy. There are many accounting bodies to foresee financial accountability in organizations by training and mentoring those in the accounting profession to instill an unethical mindset when it comes to handling finances. Since so many companies have collapsed due to financial negligence, there is a need to look into the aspects of ethics and standards in accounting practice as a proactive measure to eliminate possibilities of bankruptcy in organizations. (Uyar & Güngörmüş, 2013). Given that there have been various financial scandals in major companies that have led to their collapse, there is a need to reevaluate the ethics and standards and see where companies failed as far as their financial accounting is concerned.

Financial institutions are the most prone fraud, given that they deal with finances as their major input and output. Enron Corporation was once a Wall Street financial giant, but fraudulent dealings and lack of transparency lead to its collapse. The company serves as an example that unethical decisions can sweep thriving organizations, indicating that financial accountability is a critical aspect of any company's success.

Prior research indicates that teaching ethics is fundamental in the management accounting profession, but education alone is not enough to integrate ethical conduct in individuals (Kidwell, Fisher, Braun, & Swanson, 2013). This paper offers a review of theoretical and practical foundations under the management of accounting, and establish the fundamental considerations when establishing the ethical basis for conduct in management accounting (Kidwell, Fisher, Braun, & Swanson, 2013)

Ethics in the accounting environment

Ethics in accounting demands that financial statements ought to be useful for the end-users to guarantee ease of financial decision making. Business societies expect that accounting professionals will abide by the ethical standards and guarantee accurate, timely, and transparent information to all end users (Kidwell et al., 2013). According to Mathenge (2012), all attempts directed towards the deliberate construction of false financial statements could extensively damage an organization's reputation and result in the following:

• increasing criminal and fraudulent activities. When this happens, the poor ethical considerations by the accountants of a company tend to diminish the level of oversight as well as control by the management. It also develops loopholes for auditors to undertake unethical behavior and conceal evidence (Mathenge, 2012).
• Damage to organizational reputation. Unethical accounting activities by the professionals end up affecting the organization’s trustworthiness to its stakeholders, making it difficult for them to conduct business. When there is continued mistrust, stakes holders pull back, leading to the downfall of a company. (Mathenge, 2012).

Consideration of Rules and Regulations

Both the private sector and the government must adopt drastic measures whose focus is to instill ethical practices in the accounting profession. Developing an accountants' code of conduct will help ensure mitigation and reduce unethical tendencies in the profession (Beaudoin, Cianci & Tsakumis, 2015). Such code should delineate the rules that guide the professional conduct among accounting professionals via improving the financial market and offering a guarantee for financial information. Reliable financial information is critical in making informed decisions by stakeholders and investors. Adhering to the profession’s codes has contributed to individual growth. It also sustains and supports nonprofit entities to aid in offering training in social as well as economic goals. This training boosts the accountabilities of such organizations in financial management (Beaudoin, Cianci & Tsakumis, 2015).

The case of management of inappropriate accounting and earnings management at Enron

After the Enron scandal, the company encountered intensive infamy that ended in bankruptcy (Catanach & Ketz, 2012). Enron Cooperation, the Wall Street giant in the accounting industries, decided to take advantage of public and government entities and investors by increasing its wealth through illegal and unethical activities. Investigations conducted by the securities exchange commission found that Enron had been engaging in unethical activities such as fraudulent financial reporting (Thomas, 2012). The activities significantly reduced their stock in the capital market, posed a direct impact on their corporate reputation, caused a major setback to their brand name, and ultimately resulted in Enron's collapse (Catanach & Ketz, 2012). What followed was the fact that the company suffered from the huge penalties along with the strict laws concerning their accounting standards that were introduced to provide additional transparency and reliability to the company financials (Catanach & Ketz, 2012). When a company engages in fraudulent deals, the unsuspecting investors find themselves on the web, as it happened to those who invested in it.

Before the fall of Enron, stringent safety measures had already been adopted to aid the public and investors' protection. Some of these measures include the GAAP: Generally Accepted Auditing Standards and generally accepted accounting principles, in addition to statements on auditing and ethics laws (Hostak, Lys, Yang, & Carr, 2013). The necessity to utilize both GAAP standards by the accountants offers the standard protocol that offers the dynamic set of both specific and general stipulations when it comes to the preparation of financial statements and documents (Tweedie, Dyball, Hazelton, & Wright, 2013). However, it follows that other than these stipulations, it is necessary to make the auditing of financial statements external, and independent auditors ought to conduct strict checks to ascertain if an organization has consistently complied with the GAAP guidelines during the preparation of their financial statements. Since most accountants are very murky, external audits unravel fraudulent activities as opposed to the internal one. However, it is important to note that Enron was conscientious enough to conduct forgery that concealed their illegal activities. Presenting fake statements made the company operate for a prolonged period, and embezzling more money, with this longevity. (Tweedie, Dyball, Hazelton, & Wright, 2013).

In Enron’s case, external auditing regulations had been strongly adopted to ensure that investors have been prevented from raising money from the increased investment. It happened by disclosing their accountabilities to subsidiaries and strengthening their balance sheet with values based on inflated assets (Catanach & Ketz, 2012). When investors realize that a company is running at a loss, they pull out, which serves as a way of protecting the investors' money, and any other prospect. However, Enron failed to incorporate the information concerning such organizations in reporting their financial statements, which led to significant misstatements, but this did not happen for long.

Based on the issues addressed in this case, it is integral to guarantee high ethical standards when it comes to accounting. It ensures the preparation of valid and reliable statements (Morales-Sánchez & Cabello-Medina, 2013). In instances where changes are needed, it is imperative to ensure they have been executed to avert the recurrence of similar fraudulent incidents. Further, it is essential to ensure that organizations have integrated counseling and training sessions to ensure that they observe the ethical standards in their accounting procedures (Tweedie, Dyball, Hazelton, & Wright, 2013). Accounting is a sensitive sphere that needs adequate post mortems to avoid such disasters. It is worth noting than the price of Enron's shares went from $90.75 at its peak to $0.26 at bankruptcy, and the company had to pay its creditors more than $21.7 billion from 2004 to 2011.

The challenge

 The 21st century has experienced thrive in accounting, which is an indicator of the management's failure to oversee the conduct of accountants (Jaijairam, 2017). Even the presence of professional ethics standards developed by accounting bodies has not been able to control being ethical conduct in an organization. Financial institutions are growing and collapsing at the same time due to ethical business practices. Accounting departments violate the codes of the practice, which provide leeway fraud, funds embezzlement, and forgery in institutions (Shafer, 2015). Elements like accountability, transparency, clear reporting standards, and ethical professionals have an integral part in promoting positive accounting processes in any organization. The Enron Corporation case study will contribute to the promotion of efficient and effective accounting and financial management. Consequently, fostering commitment and freewill between organizations, investors, stakeholders, and customers.

Rest’s ethical decision-making consideration

The main constituent of the establishment of accounting revolves around ethical decision making. An accountant practice becomes more money centered, which increases the likelihood of ethical dilemmas increases. Rest's Four Component Model of Morality is a theoretical framework that proposes that the production of moral behavior is complex and involves four distinct psychological progressions: moral sensitivity, moral judgment, moral motivation, and moral character and implementation.

Moral judgment

Financial accountability is a moral obligation that stems from a person’s personality. By not observing the ethical framework in accounting, the Professionals violate the codes of conduct, which is a criminal offense. What guides this assessment is that individuals ought to judge the action they believe will be most justifiable based on their moral sense (Shafer, 2015). The other attribute that guides this assessment is authoritative reasoning, which requires ethical judgment and acts as the model's critical thinking attribute. An individual's prescriptive reasoning is his or her assessment that stems from ethical reasoning. Prescriptive reasoning exhibits position factors that lead to the use of a specialized cognitive structure dependent on an individual's growth (Shafer, 2015).

Moral sensitivity

Moral sensitivity is based on the interpretation of situations, assessing how one's actions or inaction could impact third parties. It revolves around the consideration of cause-effect implications and recognizing a moral challenge whenever it exists. Ethical decisions commence when a decision-maker identifies a specific situation going to impact others' welfare and thus determine the moral component of the matter (Mathenge, 2012). Before one can act ethically, they must comprehend that there is an ethical issue present. Empirical studies have demonstrated that accounting students who have been exposed to ethical settings consider ethical issues more often when presented with an ethical scenario than their counterparts that lack such exposure (Morales-Sánchez & Cabello-Medina, 2013). Enron was insensitive in its dealings. When a person is critical, they analyze situations and avoid unpleasant outcomes. However, this company exhibits senselessness, which leads to bankruptcy that had financial implications on innocent investors. Rest’s ethical decision-making, calls for rationalization in decision making, which Enron overlooked.

Moral motivation

Ethical motivation involves prioritizing ethical actions over other goals and needs. This attribute is based on one's commitment to follow moral action even when faced with other alternatives. When a person values the moral action over immoral and takes responsibility for the implication of these moral outcomes, the person is said to be of sound morals. (Thomas, 2012). In this case, the strategy encompassed the formulation of options that will be used to resolve the ethical challenge and select the option that an individual feels motivated to adopt (Shafer, 2015). Management has no moral standing, given that they made a series of unbecoming decisions, such as engaging in forgery. An upright person is not motivated by selfishness, by the common good. A morally upright individual acknowledges the diverse activities that they have an opportunity to undertake and establish the implications that will be favorable for all the stakeholders involved in the issue.

Theoretical Perspective

The virtue theory, as it relates to accounting, asserts that an agent is praised or blamed for their voluntary acts and disposition of their character traits. This theory leads to the success of an organization and personnel satisfaction demand professionals controlling their actions and rationally acknowledge the implications of their actions (Farag & Elias, 2012).

The utilitarian theory

The theory argues that an action is good when it serves right to the majority. The theory is founded on the premise of the greatest good or happiness. Actions are considered right according to the proportion of their advancement of happiness and wrong when they led to the opposite. Further, the concepts of obligation, duty, and right are subordinated and determined by that which will maximize benefits and diminish adverse outcomes (Brilhante & Rocha, 2013). A person should distance themselves from actions that only benefit a few but hurt many. In the case of Enron, many investors and society were affected due to their crimes. Enron engaged in the murky business because it only benefitted them. Corporate Social Responsibility demands that cooperation serve the good of the community, but Enron did otherwise.

Kant’s theory and advancement of responsible accounting

Kantian’s model of moral responsibility sees a person as a moral agent. Thus, the right or responsible action is not the one that maximizes utility but the ones that abide by the moral principles and capable of becoming universal moral laws. Right action is one that serves the common good, an aspect that makes the action moral. Enron's actions were ill-motivated as they led to the suffering of the society, thus making the actions unethical. (Tweedie, Dyball, Hazelton, & Wright, 2013).

The necessity for professional judgment rather than personal judgment in accounting

Every organization has a culture. An organization’s culture founds the norms that end up dictating individual and group behavior in organizations. The underlying ethical decision making attributes that are prevalent in the organizational culture of the accounting profession dictate the use of professional judgment when it comes to making appropriate decisions. In resolving ethical issues that emerge in management accounting, individuals should distance themselves from personal judgment (Martindale & Collins, 2012). The organizational ethical culture is based on compliance with the established profession’s code of conduct. The ethical decision-making attributes relate to the individual’s ethics system. The application of ethics perspective, moral reasoning, and the degree of their moral reasoning are founded on ethical decision making. (Martindale & Collins, 2012).

All ethical systems can either be centered on one's duties or based on the result. The duty centered ethical perspective is the core attribute that guides professional judgment in place of personal judgment since it advocates on an individual’s obligation or duty when determining their compliance with the set professional standards and norms (Ni & Van Wart, 2015).

An individual’s application of an ethical perspective can either be holistic. When this is the case, they attribute professional judgment or individualism, referring to the personal judgment perspective (Craft, 2013). The case can also be based on a holistic perspective, which relates to applying ethical perspectives. It is based on the value system and norms established by the management accounting profession. This position is supported by the fact that decision making that is relative to the resolution of ethical concerns in the field of management accounting is founded on the aspect of profession-shared norms. When norms are shared, it impedes unethical behaviors as every individual would have a diverse opinion when it comes to unethical conduct (Craft, 2013).

Ethics and professional conduct

The general public exhibits concerns that are directed at the impact ethical issues have had on business practices. Professional bodies drafted ethical statements to guide organizations in their operation. (Uyar & Güngörmüş, 2013). Thus, professional accountings bodies possess an assortment of the code of ethics that are meant to govern how their members interact with others, ensuring that the behavior of their members observes the expectations of their stakeholders. The involvement of members of accounting bodies with large organizational collapses and scandals revolving around fraud tends to reflect badly on the profession. The accounting body has done a lot of transformation in the accounting profession. However, it is apparent that some companies still find loopholes Enron is an example of such, indicating that the professional body needs to reevaluate its workability. (Uyar & Güngörmüş, 2013).

The profession idea

One of the earliest positions in the code of ethics was to make the accounting profession act in the interests of the public through cooperate responsibility. Such attributes have been established as being fundamental to the creation of a profession. The code includes the aspect of possessing a skill founded on theoretical knowledge, accessing specialized training or education, testing member’s competencies, abidance to a code of conduct, and the altruistic delivery of services (Craft, 2013). Within discussions revolving around any profession, the underlying attribute is a commitment to public service and ethics. Based on the above code, the accounting professional should be conducted to advance public interest as the core defining element. Thus, if accountants are to remain part of the profession, it is imperative to have an unambiguous declaration of allegiance to the overriding principle of public service. Enron violet this code of conduct concerning accounting. They conned unsuspecting investors to their advantage and harmed society. (Craft, 2013).

Consideration of rules and regulations

Ethics and Earnings management

Stakeholders in the accounting profession face earnings management, as the main problem. Fraudulent incidences within financial entities occur when accountants and managers fail to observe the established standards of earnings management ethics. In these instances, managers, along with accountants, amend financial information to misrepresent the actual state of finances (Beaudo in, Cianci & Tsakumis, 2015). The modification encompasses the addition of predetermined outcomes in the financial statements that end up producing different results than the truth.

The behavior of manipulation of earnings within the accounting profession is known as management of earnings. It results in doubt, especially when data infringements and fraudulent activities have occurred. Enron is the best example for management earnings The organizational culture or social norms that link earnings management ethics have an integral role in the determination of the norms that should be observed in an organization (Beaudoin, Cianci & Tsakumis, 2015). The acts, amendments as well as articles contained in the Sarbanes-Oxley act aid in entrenching ethical standards with the financial environments. Failing to curtail organizational tolerance to the levels of earnings management based on response to the Sarbanes-Oxley act would end in a significant discrepancy between the culture of the organization and the societal norms for management of earnings behavior (Martindale & Collins, 2012).

After the Sarbanes Oxley act was introduced, the scandals in the accounting departments in the various corporation were unraveled. The high-profile corporate accounting scandals like Tyco, Enron, and WorldCom shook investors' confidence, especially in the United States (Hostak, Lys Yang, & Carr, 2013). The act strongly demands that the management of an organization has accurate and financial reporting. Further, on issues of the competence level of an organization's internal control system aiding in the disclosure of its weaknesses, it is critical that they provide reasonable assurance there will be accurate and fair reporting. These provisions are expected to guarantee ethical earnings management tendencies by the entity (Hostak, Lys Yang, & Carr, 2013). Enron was unethical as it forged accounting books to hide their ill motives. The management used the investors' money to enrich themselves, and by the time the company was declared bankrupt, it owed the public and stakeholders a lot of money. The kind of earning presented in such a scenario is unethical.

Conclusion

Effective accounting is founded on a strong ethical framework. The accounting profession calls for adherence to the codes and standards to avoid misappropriation of funds in the organization. Irresponsibility in the accounting department leads to bankruptcy and the collapse of giant companies and small companies alike. The culture of an organization is significant in giving direction to the financial management team. Financial accountability is a moral obligation that calls for individuals to seek the right motivation to limit the embezzlement of funds. Ethical decision-making attributes and found in the organizational culture of the accounting profession and entails assessing professional judgment instead of personal judgment when looking at the appropriate basis of decision making. Professional judgment is essential in making critical decisions that concern money because subjective decisions can lead to compromises.ethical considerations are paramount for the accounting profession's success. Professional bodies must advance business reputation as well as the usefulness of financial statements. By doing this, fraud and criminal activities are diminished within an organization's accounting department. Various theories have indicated that individuals do not take the issue of financial responsibility seriously because of vested interest. Enron Corporation is an example of a giant financial company that has collapsed due to a lack of accounting practice codes of ethics. When a big company collapses, it is their employers and the community that suffers. It does not pay, when business people embezzle money only to be required by the law to replace the money later after they have squandered it.

Recommendation

Financial negligence in corporations can lead to bankruptcy and the shutdown of big corporations. Enron corporation should serve as an example for companies that do not take financial responsibility with the required seriousness.

There should be a new and revolutionary approach to corporate governance that incorporates all stakeholders in financial responsibility rules. The top management, directors, shareholders, and employees should share the corporations' goals and visions. When various multidisciplinary teams are engaged, it would be difficult for specific individuals in the organization to engage in the embezzlement of funds. Board elections should be democratic who allows their employees to choose a leader that is best to lead an organization as this can reduce Earnings management.

Financial accountability education mustn't be independent enough to equip professionals with the knowledge and skills that they need to uphold their moral standards. However, there is a need to emphasize this as it may lead to a changed attitude, which will foster financial accountability in institutions. They should be more attention devoted to the

proper induction, training, and development of board members

Due to what befell Enron, new ways of holding senior executives accountable in a stakeholder-oriented firm must be found. The manager's powers to choose between profit maximization and multiple stakeholder benefits should be limited. Since the board of directors of vested interests in organizations, they cannot effectively judge whether the top management is doing what is right or wrong.

Corporate social responsibility should be re-advertised. The board should have the mandate to ensure that the management is deeply committed to corporate social responsibility mission and not just profit-making. the board should first accept that there is more order cadence in the financial accounting profession and that corruption is imminent, in which case the program of multiple stakeholder benefits may become inefficient but fraudulent

Professional governing bodies should be more vigilant in their operations and detect fraudulent dealings in corporations. These bodies should not only rely on internal and external audit statements but apply the use of fraud detectors as a way of curbing embezzlement of funds and corporate crime incorporation.