Ethics - CMA Part 2

In The Name of God The Beneficent The Merciful
Ethics
IMA Statement of Ethical Professional Practice
o Practitioners of management accounting and financial management
shall behave ethically. A commitment to ethical professional practice
includes overarching principles that expressour value sand standards
that guideour conduct.
o
IMAs overarching ethical principles include:

1) Honesty.
2) Fairness.
3) Objectivity.
4) Responsibility.
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Ethics
o
Honesty, means fairness and straightforwardness of conduct.

Examples of honesty include:
1) Refusing to record information that is anything less than accurate.
2) Providing factual information to others.
Fairness, means acting in an impartial manner and being free from

bias. Examples of fairness include:
1) Identifying and fixing mistakes.
2) Selecting vendors without bias.
Ethics
o
Objectivity, means based judgment on an established set of criteria.

Examples of objectivity include:
1) Stating relevant financial and legal giudelines.
2) Maintaining standards for documenting information.
Responsibility, means doing what you say you will do when you say
you will do it. Examples of responsibility include:
1) Ensuring information on reports is accurate.
2) Gathering enough information to make an informed decision.
Ethics
Conflict of Interest
o A conflict of interest is a conflict between the personal and the official
responsibility of a person in a position of trust, sufficient to effect
judgment, objectivity, or independence in conducting affairs of the
business.
o
Methods for control of conflict of interest include:

1) Prohibit financial ties to any supplier, customer, or distributor.
2)
Employees should refuse any gift or favor that would influence or

would appear to influence their actions.
Ethics
Standards
o The IMA Statement of Ethical Professional Practice identifies and
explains four standards that help defined members ethical
responsibility:
1) Competence, is the quality of having the required skill,
knowledge and capacity to fulfill a particular job effectively.
o
2)
Confidentiality, is not disclosing information to people who are

not authorized to know it.
3)
Integrity, is adhering strictly to a code of values.
4)
Credibility, is the quality of being believable and trustworthy.
Ethics
Competence
o Each member has a responsibility to:
1) Maintain an appropriate level of professional expertise by
continually developing knowledge and skills.
o
2)
Perform professional duties in accordance with relevant laws,

regulations and technical standards.
3)
Provide decision support information and recommendations that

are accurate, clear, concise and timely.
4)
Recognize and communicate professional limitations.
Ethics
Confidentiality
1) Keep information confidential except when disclosure is
authorized.
o
2)
Inform all relevant parties regarding appropriate use of

confidential information.
3)
Refrain from using confidential information for unethical or illegal

advantage.
Ethics
o
Examples to keep information confidential:

Do not discuss confidential information in any public setting, either
on a cell phone or face to face, because it could be overheard.
Do not discuss confidential information with family or friends.
Ethics
Integrity
1) Mitigate actual conflicts of interest.
o
2)
Refrain from engaging in any conduct that would prejudice

carrying out duties ethically.
3)
Abstain from engaging in or supporting any activity that might

discredit the profession.
10
Ethics
o
Suggestions for maintaining your integrity:

Do not accept any gifts, favors or anything else that could cause
you to feel an obligation to someone.
Do not just tell your superiors what they want to hear.

Communicate both the good and the bad news.
11
Ethics
Credibility
1) Communicate information fairly and objectively.
o
2)
Disclose all relevant information that could reasonably be

expected to influence an intended users understanding of the
reports, analyses, or recommendations.
3)
Disclose delays or deficiencies in processes, information or

internal controls.
12
Ethics
o
Credibility may involve things such as:

If news is bad, do not delay in giving it.
Assess risks ahead of time in order to be prepared.
Maintaining your competence.
13
Ethics
Resolution of Ethical Conflicts
o In applying the standards of Ethical Professional Practice, you may
encounter problems in identifying unethical behavior or in resolving
an ethical conflict. When faced with ethical issues, you should follow
your organizations established policies on the resolution of such
conflict. If these policies do not resolve the conflict, you should
consider the following courses of action:
o
1)
Discuss the issue with your immediate superior except when it

appears that the supervisor is involved. In this case, submit the
issue to the next higher level.
14
Ethics
o
Resolution of Ethical Conflicts

2)
Initiate a confidential discussion with an IMA Ethics Counselor or

other impartial advisor to obtain a better understanding of
possible courses of action.
3)
Consult your own attorney as to legal obligations and rights.
15
Ethics
o
Note: You have to be aware that a particular behavior may exemplify

more than one Principle and/or Standard. For example, competence is
the quality of having the required skill, knowledge, qualifications, and
capacity to fulfill a particular job effectively. And credibility is the
quality of being believable and trustworthy, which requires
maintaining your competence, which means maintaining the required
skill, knowledge, qualifications and capacity to fulfill your job
effectively so that your colleagues can trust what you say.
16
Ethics
How the external environment impacts ethical business practices of
organizations
o One of the main external influences impacting the ethical business
practices of organizations is the legal requirements imposed by
governments and regulatory agencies.
o
Foreign Corrupt Practices Act (FCPA)

o The first and primary legislation impacting corporate ethical business
practices in the U.S. is the Foreign Corrupt Practices Act (FCPA). The
FCPA of 1977 was enacted in response to disclosures of questionable
payments that had been made by large companies.
o
17
Ethics
o
Investigations by the SEC had revealed that over 400 U.S. companies
had made questionable or illegal payments in excess of $300 million
to foreign government officials, politicians and political parties. The
payments were either illegal political contributions or payments to
foreign officials that bordered on bribery.
The FCPA prohibits payments to foreign officials, politicians, or

political parties to obtain or renew business.
18
Ethics
The FCPA contains two sets of provisions:
o Accounting provision
Books and records, issuers are requires to make and keep books,
records, and accounts that properly reflect transactions and
dispositions of assets.
o
Internal control, all issuers must device and maintain a system of

internal accounting control.
19
Ethics
o
Anti-Bribery
No demotic concern, including any person acting on its behalf,
whether or not doing business oversees and whether or not
registered with SEC, may offer or authorize corrupt payments to
any foreign official, foreign political party or candidate for political
office in a foreign county.
Note that only payments to foreign officials and politicians are

prohibited; payment to foreign business owners or corporate officers
are not addressed by the FCPA.
20
Ethics
o
Note: The FCPA provides an exception to the general prohibition of

payments to foreign officials. Payments to government officials for the
performance of routine government services are allowed.
Sometimes it may be difficult to decide whether a payment is being

made for routine government services or is a bribe. In this case the act
states that the person making or authorizing the payment must have a
corrupt intent in order to be found guilty under the FCPA.
21
Ethics
Sarbanes-Oxley Section 406
o Another legal requirement for organizations regarding ethical business
practices is found in the Sarbanes Oxley (SOX) legislation. Section 406
of SOX refers to a code of ethics for senior financial officers. Section
406 requires the following:
1) It directed the SEC to issue rules requiring each issuer of
securities to disclose in its periodic reports to the SEC whether or
not it has adopted a code of ethics for senior financial officers
and if not, why not.
o
2)
Disclose immediately by means of a Form 8-K filed with the SEC

or by other electronic means any change in its code of ethics for
senior financial officers.
22
Ethics
o
Section 406 defines the code of ethics as a statement of standards

that are necessary to promote:
honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and
professional relationships,
full, fair, accurate, timely, and understandable disclosure in the

periodic reports required to be filed by the company, and
compliance with applicable governmental rules and regulations.
23
Ethics
Ethics starts at the top
o Ideally everyone in an organization, from the board of directors to the
CEO to the front-line worker, will answer the next questions in a
similar manner
What value does this organization believe in?
What principle drive this organizations decision making?
By what ethical standards does this organization live?
o
These questions are the basis for articulating a cohesive code of

conduct. Once the companys values are defined, they are applied to
different areas of the organization to provide daily guidance on what
individuals are expected to do and what they are expected not to do.
24
Ethics
o
Because they are broadly written, these short statements may be

interpreted differently by individuals. Therefore, the next step is for
senior management to expand each principle into a more specific
behavioral profile.
In the absence of a defined code of conduct or ethics , employees

either will follow their own beliefs and values or look for guidance
from leadership to determine the expected course of action.
Therefore, it is essential that management hold it self to a higher
standard of conduct than expected from those who are supervised.
25
Ethics
Applying Ethics in a corporate setting
o As important as a code of ethics is, ultimately it is only a document.
What gives the code life and produces the inherent benefits are the
people who live that code. It is not enough for management to hold
itself to a higher level of conduct. If an organization wants to create a
climate where doing the right thing is the norm, it is important to hire
the right people, provide them with adequate training, and then
practice consistent values-based leadership.
o
The process begins with hiring employees. Although values are

difficult to measure, they can be inferred by asking about personal
values, using open-ended interview questions about how they would
respond to a specific circumstances.
26
Ethics
o
Once the right employees have been hired, training is the next
priority. Training programs should be comprehensive, relate to realworld situations faced by employees. Employee training is a key part
of maintain an ethical organizational culture. In addition to having
each employee read and understand the code of ethics, training
should explain the concepts that lie behind the code.
27
Ethics
o
The Statements on Management Accounting (SMA) specifies that

ongoing training should include these expectations:
How ethics are built into work management methods.
How ethics affects specific jobs, processes, activities, and
relationships.
How the organization monitors compliance with code.
The actions and penalties once noncompliance is proven.
What action is taken when a compliant or issue is defined.
An organizations culture is made up of the accumulated behavioral

actions of all of its employees over time.
28
Ethics
Measuring and improving ethical compliance
o As stated in the SMA value and Ethics: from Inception to Practice,
One of the greatest problems in achieving ethical compliance is the
ability of any organization to actually be aware of what is happening
on a day-to-day basis and making ethical compliance a core element
of its mainstream governance and accountability framework.
o
Legal and regulatory mandates may serve as a deterrent to unethical

behavior. However, management is responsible for instituting internal
control and operational transparency.
29
Ethics
o
Internal control provide a framework for identifying and controlling

the risks that exists within an organization. They also can be used to
assess the amount of risk to which an organization is exposed. Internal
controls that are in alignment with company values serve to
strengthen the culture.
Various tools are available to measure and improve compliance with

ethical values; they include the human performance feedback loop,
survey tools, and a whistleblowing framework.
30
Ethics
Human Performance Feedback Loop
o To improve compliance, performance review systems must be aligned
with organizational values and ethics statements. Employee job
descriptions, required competencies, and performance objectives
should include ethical expectations.
o
Employee reviews, conducted annually, should evaluate the

individuals compliance with ethical expectations along with
operational goals. For example, an evaluation might rate not only
accuracy and timeliness of an employees reports; it also could rate his
performance in treating all others with dignity and respect. Ideally,
the feedback used to make this evaluation would include 360-degree
input, including both internal and external responses.
31
Ethics
Survey Tools
o Survey tools involve submitting survey questions to the companys
employees regarding the companys ethics policies and asking for
anonymous written responses. This involvement of employees gives
senior management and the board of directors information about
how well the organizations code of ethics is being understood and
followed.
o
32
Ethics
Whistleblowing Framework
o A whistleblowing framework is an important framework component in
maintaining an ethical organizational culture.
o
An effective feedback system includes having a confidential

framework for employees to report possible violations of the
organizations code of ethics and to receive advice on the ethical
aspects of challenging decisions.
33
Ethics
o
Whichever approach an organization chooses, the collection, analysis,

and summarization of ethics issues can provide insights into the
operation of its code of ethics and the degree to which employees are
following it. In addition, tracking and monitoring issues raised through
a whistleblowing framework creates opportunities to enhance and
improve internal controls.
34
Ethics
Fraud and Fraud Risk Model
o Types of fraud
1) Fraudulent financial reporting, is most often committed by
management to deceive financial statements users.
o
2)
Misappropriation of assets, is most often committed by

employees and results from theft or embezzlement.
35
Ethics
The fraud risk model (Fraud Triangle)
o There are three characteristics of fraud:
1. Pressure (motivation).
2. Opportunity.
3. Rationalization.
o
Rationalization
Opportunity
Pressure
36
Ethics
o
Pressure, is a persons reason for committing fraud. Pressure for

misappropriation of assets is typically motivated by the need for cash
(Few individuals are motivated to steal just to have the assets).
Opportunity, relates to the ability of a person not only to perpetrate

but also to conceal a fraud. Opportunity is the only characteristic of
fraud that management can control.
Rationalization, the employee needs to justify the crime as an

acceptable act. For example he would say that my employer is
dishonest to others and deserves to get dishonesty back or I am
being under paid and my employer owes this to me.
37
Ethics
Red flags factors indicating potential fraud
o Misappropriation of asset
1) Large amount of cash on hand.
2) Poor supervision.
3) Failure of certain employees to take vacations.
o
Fraudulent financial reporting

1) Performances too bad or too good to be true.
2) High turnover of senior management, counsel, or board
members.
3) Pressures to meet analysts' earnings expectations.
38
Ethics
Addressing Fraud and Error
o Internal controls are designed to, among other things, prevent fraud.
However, because of the concealment aspects of fraudulent activity,
the controls cannot give absolute assurance that material fraud will be
prevented or detected.
o
Controls Classified as Preventive, Detective and Corrective

o Preventive controls prevent errors and fraud before they occur.
Examples of preventive controls are segregation of duties, job
rotation, and training and competence of personnel.
o
39
Ethics
o
Detective controls uncover errors and fraud after they have occurred.
Examples of detective controls are batch control totals, completeness
checks, hash totals, batch balancing, check digits, limit checks, and
validity checks.
Corrective controls are used to correct errors. Examples of corrective

controls are backup and recovery, and audit trails.
40
Ethics
Control Activities
o Control activities are the policies and procedures that help ensure
management directives are carried out. They are the backbone of the
companys efforts to address the risks it faces, such as fraud.
o
The six principles of control activities are as follows:

1) Physical controls
2) Segregation of duties
3) Human resource controls
4) Independent Checks and Verification
5) Establishment of responsibility
6) Documentation procedures
41
Ethics
o
o
o
o
o
Physical controls
Safes, vaults, and safety deposit boxes for cash and business papers
Alarms to prevent break-ins
Television monitors to deter theft
Computer facilities with pass key access
Establishment of responsibility
o An essential principle of internal control is to assign responsibility to
specific employees. Control is most effective when only one person is
responsible for a given task.
o
42
Ethics
Segregation of Duties
o Duties need to be divided among various employees to reduce the
risk of errors or inappropriate activities. This ensures that no single
individual is given too much responsibility so that no employee is in a
position to both perpetrate and conceal irregularities.
o
Companies should assign related sales activities (making a sale,

shipping the goods to the customer, billing the customer, and
receiving payment) to different individuals.
43
Ethics
Independent Checks and Verification
o This principle involves the review of data prepared by employees. To
obtain maximum benefit from independent checks and verification:
1) Companies should verify records periodically or on a surprise
basis.
o
2)
An employee who is independent of the personnel responsible

for the information should make the verification.
44
Ethics
Human Resource Controls
o Human resource control activities include the following:
1) Bond employees who handle cash. Bonding involves obtaining
insurance protection against theft by employees
o
2)
Rotate employees duties and require employees to take

vacations.
45
Praise be to God

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In The Name of God The Beneficent The Merciful

IMAs overarching ethical principles include:

Honesty, means fairness and straightforwardness of conduct.

Fairness, means acting in an impartial manner and being free from

Objectivity, means based judgment on an established set of criteria.

Methods for control of conflict of interest include:

Employees should refuse any gift or favor that would influence or

Confidentiality, is not disclosing information to people who are

Integrity, is adhering strictly to a code of values.

Credibility, is the quality of being believable and trustworthy.

Perform professional duties in accordance with relevant laws,

Provide decision support information and recommendations that

Recognize and communicate professional limitations.

Inform all relevant parties regarding appropriate use of

Refrain from using confidential information for unethical or illegal

Examples to keep information confidential:

Do not discuss confidential information with family or friends.

Refrain from engaging in any conduct that would prejudice

Abstain from engaging in or supporting any activity that might

Suggestions for maintaining your integrity:

Do not just tell your superiors what they want to hear.

Disclose all relevant information that could reasonably be

Disclose delays or deficiencies in processes, information or

Credibility may involve things such as:

Assess risks ahead of time in order to be prepared.

Maintaining your competence.

Discuss the issue with your immediate superior except when it

Resolution of Ethical Conflicts

Initiate a confidential discussion with an IMA Ethics Counselor or

Consult your own attorney as to legal obligations and rights.

Note: You have to be aware that a particular behavior may exemplify

Foreign Corrupt Practices Act (FCPA)

The FCPA prohibits payments to foreign officials, politicians, or

Internal control, all issuers must device and maintain a system of

Note that only payments to foreign officials and politicians are

Note: The FCPA provides an exception to the general prohibition of

Sometimes it may be difficult to decide whether a payment is being

Disclose immediately by means of a Form 8-K filed with the SEC

Section 406 defines the code of ethics as a statement of standards

full, fair, accurate, timely, and understandable disclosure in the

compliance with applicable governmental rules and regulations.

These questions are the basis for articulating a cohesive code of

Because they are broadly written, these short statements may be

In the absence of a defined code of conduct or ethics , employees

The process begins with hiring employees. Although values are

The Statements on Management Accounting (SMA) specifies that

An organizations culture is made up of the accumulated behavioral

Legal and regulatory mandates may serve as a deterrent to unethical

Internal control provide a framework for identifying and controlling

Various tools are available to measure and improve compliance with

Employee reviews, conducted annually, should evaluate the

An effective feedback system includes having a confidential

Whichever approach an organization chooses, the collection, analysis,

Misappropriation of assets, is most often committed by

Pressure, is a persons reason for committing fraud. Pressure for

Opportunity, relates to the ability of a person not only to perpetrate

Rationalization, the employee needs to justify the crime as an

Fraudulent financial reporting

Controls Classified as Preventive, Detective and Corrective

Corrective controls are used to correct errors. Examples of corrective

The six principles of control activities are as follows:

Companies should assign related sales activities (making a sale,

An employee who is independent of the personnel responsible

Rotate employees duties and require employees to take