Understanding the Importance of Business Ethics in Managerial Accounting

Understanding the Importance of Business Ethics in Managerial Accounting
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Why Ethics Is Important in Managerial Accounting

The Enron scandal is probably the most well-known example of improper accounting ethics on the part of a business’ managers. But others companies have also played a role in increasing awareness about the importance of ethics in the business community: WorldCom, Rite Aid, and Global Crossing, to name a few.

Financial reversals, jail terms, and business collapse have been the fruit reaped from unethically-sown business practices by these entities. But the financial reversals experienced by average investors and others who trusted the leadership involved in these company’s accounting practices have also suffered, spurring regulatory changes to protect the average person in the future.

Competence and Confidentiality

There are four ethical components of the IMA of the United States (Institute of Management Accountants): competence, confidentiality, integrity, and credibility.

These components mirror why business ethics are important in managerial accounting. First, if a managerial accountant is not competent at their profession, they will be unaware of important rules and regulations and laws locally, state-wide, and federally. This could jeopardize the organization substantially.

Second, if the managerial accountant is not confidential about financial matters and uses their access to information for unethical purposes or gain, it could ultimately result in a company going under and many people losing their livelihoods.

Integrity and Credibility

Third, it is important that managerial accountants refrain from any activity that could be construed as a conflict of interest. Managerial accountants that participate in activities that are a clear conflict of interest are breeding distrust. Even if they are not showing any favoritism to a production shift supervisor who happens to be a relative, other shift supervisors will assume that they are fudging numbers if that supervisor’s production performance is better.

Fourth, honoring ethical procedures in managerial accounting cannot be accomplished unless the managerial accountant discloses any and all relevant information available to the person making a decision that will impact the company. To do otherwise is not only unethical; it limits the decision-maker from making an informed decision, thus jeopardizing the businesses success as a whole.

Unethical, Untrustworthy Managerial Accountants

Businesses rely on word of mouth and past conduct to customers and creditors to remain successful. A company’s day-to-day managerial accountants are relied upon to portray accurate market purchasing trends, inventory quantity levels, as well as expected costs for supplies and production labor.

If the managerial accountant is unethical, these numbers could be skewed. And skewed accounting reports can result in not having needed supplies on hand to produce and meet orders, as purchasing agents rely on these reports. It can result in overestimating an the ability to pay creditors, resulting in un-kept financial commitments. And, it can result in faulty premises regarding the financial viability of the company when making decisions to expand to new markets or add additional product lines. Thus, the importance of ethics in managerial accounting boils down to the potential of business success or business failure.