As a management accountant, in what ways do you think business ethics or regulation could prevent potential ethical scandals such as that which happened with Volkswagen?
As a management accountant it is very important to understand that the business ethics or regulations while performing any activity in an organization can prevent happening of any kind of ethical scandals and thus preventing an entity to fall into the danger zone. It is an internal process which is responsible to manage the entity. Allocation of various business cost to the cost of production of goods and services, identification of the budgets and pre-empting the sales or the productivity are the key reasons why managerial accounting has gained importance. Of all ethics is also a vital part of the managerial accounting and to understand the same a separate code of conduct has been prescribed specially for the accountants (Vitez, 2015).
There are certain set managerial accounting guidelines spelt out by the Institute of Management Accountants which basically lays down set ethical guidelines for the licensed as well as non-licensed accountants. The accountants are bound to follow these while preparation of accounts.
Once extended to the business world, there are various complex factors which define its role. It does not digress from Laws and Regulations and operates in a transparent environment with focus on the following:
- Working in the best interest of all Stakeholders i.e. both internal like employees and external including clients, vendors, investors, as well as the society as a whole
- Maintenance of utmost integrity with respect to the aforesaid Stakeholders
- Accountability and ethical behaviour of employees, Management and the overall Institution
- Conveying all communications in the same manner in which it is meant to be interpreted (Chandler, 2005).
The increasing number of corporate scandals has given more importance to the business ethics amongst the accountants too. The managerial accountants have been found to be the main culprit for such corporate scandals leading to a loss to the community and the society as a whole. Many entities over the years have failed to recognise the above and have indulged in unethical actions. Glaring example of this is Enron which commenced in 1985 as an energy company and made rapid progress post the deregulations of the energy markets in 1996. Expansion in additional domains meant increase in borrowings which were unethically recorded in ‘paper companies’ to reflect extremely profitable financials of the Company, thereby enhancing the value of its stock. However, this could not continue for long and by 2001, Enron recorded loss of $638 Million and in subsequent years, had to file for bankruptcy. Similar instances have been recorded over the years in major names like Mitsubishi Motors, Merrill Lynch, Sears, Citigroup etc. with even senior executives being jailed. This collapse led to further improvements of the ethical standards laid out, financial reporting format, stricter audit standards and improvising and implementing a stricter government regime. These are the responsibility of the accountants who actually prepare the financial statements and a failure on their part is what led to such scandals (Senaratne,2015).
A more recent case has its epicentre in Volkswagen – a powerhouse in the Automobile Industry with around 70% of US passenger car diesel segment. The company had diversified its present product range by installing emission software on nearly 10.5 million cars across the globe, including half a million in the US. These were meant to identify steering, throttle, and other inputs used in the Emissions Drive Cycle Set by the Environmental Protection Agency and switch to a distinct operating mode with a view to achieve higher mileage and more power. However, this also induced 40 times higher than permissible limits of nitrogen-oxide emissions, a pollutant linked to lung cancer. Thus in order to increase sales it forgot about its corporate social responsibility towards the society and contributed to the increasing pollution. (Adams, 2015).
For the aforesaid case under scrutiny and as is common to most of the earlier citations as well, the following let-downs score heavily on the failure matrix:
- Marketing Approach: The essence of Marketing is to enhance the normal saleability scales of a product against a backdrop of prevailing socio-economic scenarios. In today’s conditions, the general masses have become conscious about wide-spread environmental deterioration as a result of which, consumers were all the more influenced towards these ‘environment friendly’ cars. The incorrect statements resulted in financial and reputation losses which if at all, might take very long to patch up (Loh, 2015).
- Risk Management: In today’s ever-changing scenario, corporates are forced to consider beyond the traditional operational and financial factors. Social, environmental, circumstantial and ethical aspects have become of equal significance and have to be factored into decision making by the senior-most officials while finalising its future lines of functioning.
- Internal Audit and Control: While developing the internal governance modules of any entity, due weightage should be given to non-financial components specifically if these can be influenced to attain windfall financial gains. The various elements having direct impact on the financial outcome of the company are easily identifiable and quantifiable and hence, in most cases form the entire base for all critical decision-making. The share of pie of balance inputs, although much smaller in size, should not be neglected to ensure taming of reputational issues such as those faced by VW today (Duska, ,& Duska 2004).
The said scandal has totally taken the concepts of CSR, risk management, accounting theories ad responsibility of directors for a ride. The auditors are also held responsible for signing an audit report where the management are self proclaiming themselves as a responsible and eco friendly organization. Manipulation of accounting software is the biggest reason for the occurrence of such a scandal which clearly shows how weak the management accountancy as well as internal control procedures and the audit team was. This is a clear cut example of the importance management accounting in business ethics holds(Hotten, 2015).
As a common practice, most companies have very lucrative incentive structures which are directly linked to the various operating parameters of the entity. This induces senior officials to look beyond the levels of normalcy and if not streamlined in the right directions, may lead to manipulation of procurement, production, marketing and selling parameters to enhancement of vested interests at the cost of the company’s overall well-being. Thus it is very important for the management accountants to perform their duties with utmost care and caution so as to prevent happening of any kind of corporate scandals (Alam, 1999).
The role of a management accountant cannot be completely ignored as it is he who drives the internal processes and ensures confidentiality of the organization’s data. Thus to ensure this, the management accountant has to be trustworthy and ethical in his performances. As per Professor Horia Cristia, the managers use the information generated by these accountants basically for three purposes, making and monitoring of the plans, day to day co-ordination and formulating ethical marketing gimmicks and resolving any issues faced by the entity. Thus the management accountant’s far-sightedness towards providing information which is correct and which would drive the organization towards the right direction taking into consideration the fact that the top management defines its own policies and procedures based on the information provided by them, they should follow the highest standards of ethics in their performance (Amat et.al. 1991.
Lack of presence of independent Directors and/or Consultants often pave the way for decision making in favour of vested interest groups and spoil the internal working ethics of an organisation. Required balance of independent and related officials in the decision-making strata of a company significantly reduces influenced resolutions. This is important for the accountants to note and if their is any deviation from the same the said should be written down in clear terms so that the investors can take a informed decisions (Elias, 2006).
Many Management Accountants and Economists across the globe have cited implementation of Corporate Social Responsibility related activities as a good step towards eradicating this social crisis. ‘Triple Bottom Line’ is a proven way forward for betterment of social, economic and environmental aspects. It induces greater level of transparency across all levels of the organisation in front of the community as a whole, thereby reducing likelihood of unethical practices .Establishment of Codes of Ethical and Training on the same goes a long way in imbibing standards and values within the organisation and across all hierarchies of employment, right up to the Board (Zeiger, 2015).Further to this the top management should always encourage ‘Whistle-blowers’ by protecting and incentivising them and take strict disciplinary actions against the wrong-doers. This not only encourages more employees to indulge in this practice, but also makes misdemeanours more difficult.
The management accountants are placed in the first position in the opinion polls conducted in USA when it comes to ethical practices. The argument is totally for the topic that if the management accountants follow the basic guidelines of business ethics then corporate scandals will be minimized to a great extent (Williams, & Elson, 2010). For the same they are to adhere to four basic principles of improving on their professional competency forefront on a continuous basis, to maintain confidentiality of the information within legal boundaries, they should be unbiased as well as corruption free. Last but not the least, the said information which is communicated should be true from all angles even if not in favour of the organization. Presenting wrong information just to be in the good books of the management is unethical from their professional front as well (Lohrey, 2015).
Specific Committees may be considered for monitoring ethical behaviour and practices and members of the said Bodies should preferably be a mix from all departments and divisions of the company. This cross-functional team ensures that the members are aware of all happenings within the organisation (Armstrong, 2003).
Thus it is clear that the occurrences of the bankruptcies is basically due to lack of professional ethics that is mandatory to be followed in the accounting profession. Thus management accountants should be taught this as a separate subject of their curriculum. But the said is still a debatable issue as only classroom teaching cannot prevent such mishaps to occur. It is also the organizations contribution towards ethical decision making of management accountants. It is still at a very indecisive stage that whether proper ethical training should be provided to the management accountant or the internal controls in place are good enough to detect unethical behaviour. It is the expectation of the management which is in opposition to the principles laid down in preaching the professional ethical standards, the desire to rise high within an organization at a speedy rate and personal obligations which add to such low standard performances (Hajjawi, 2008). The accountants have to always keep this in mind that they are also employees of the company similar to their managers and it is their responsibility also to be loyal in their conducts. Thus, as a management accountant it is clear that if proper ethics are followed then business scandals can be prevented to a large extent for which certain steps are required to be undertaken as summarized below:
- Proper education on what ethics is.
- Motivation from the organization in which the accountant is employed.
- Self control and self motivation (Mintz, 1992)
Instances of Unethical Practices, whether legal or illegal, are corrosive in nature and eat into our society’s pedestal creating a void which encourages further inducement into such acts and misdeeds. No matter what, the power to abstain from such involvement and report misdemeanours lies in the hands of the masses and with sustained joint efforts along with the Government and other Public Bodies, eradication of such evils from our society should be the new shining light across the horizon. Lastly on a concluding note it is to be well understood that where the problems lie and how to deal with those problems so that such unethical business practices can be suitably avoided.
Vitez, O., 2015, About Ethics in managerial Accounting, viewed on 22nd May 2016,
Senaratne, S., 2015, The Role of Ethics in management Accounting,
Alam, K.F., 1999, Ethics and Accounting Education, Teaching Business Ethics , Kluwer Academics Publishers: Netherlands
Chandler, R.C., 2005, Avoiding Ethical Misconduct Disasters, Graziado Business Review, vol.8, no. 3
Adams, C., 2015, VW Scandal: ethics versus profit, economia, viewed on 21st May 2016,
Hotten, R., 2015, Volkswagen: The Scandal Explained, viewed on 21st May 2016,
Loh, K.M., 2015, The VW Scandal: Huge Consequences , Simple Ethic Lessons , Ominous Implications, viewed on 21st May 2016,
Zeiger, S., 2015, Effects of a Lack of Ethics on a Business Environment, viewed on 21st May 2016,
Lohrey, J., 2015, Summarizing the Role of Ethics in Managerial Accounting, viewed on 22nd May 2016,
Armstrong, M.B., 2003, Ethics Education in Accounting : Moving toward Ethical Motivation and Ethical Behavior.