<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0073022853/lo9.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Understand the ethical responsibilities of a managerial accountant.

Who among us is not shocked and dismayed by the seemingly endless stream of corporate scandals that we have experienced over the past few years? The headlines keep on coming—AOL, Bristol-Myers Squib, Conseco, Enron, Global Crossing, KPMG, Rite Aid, Tyco, Worldcom, Xerox—and the list goes on. Many of the cases involve mismanagement, some are characterized by alleged ethical lapses, and in some instances there is alleged criminal behavior. Who is to blame? According to most observers, there is plenty of blame to go around: greedy corporate executives, managers who make overreaching business deals, lack of oversight by various companies’ boards of directors (particularly the boards’ audit committees), shoddy work by external auditors, lack of sufficient probing by Wall Street analysts and the financial press, and some accountants who have been all too willing to push the envelope on aggressive accounting to (or beyond) the edge. Billions of dollars have been lost in employee pension funds, several states’ investment portfolios, and the private investment accounts of the public. It will no doubt take many years to sort out the mess. Companies have gone bankrupt; fortunes have been lost; careers have been ruined; and more of the same is yet to come. Several financial executives have filed guilty pleas on felony charges. Others have been convicted by juries. Some are serving time in prison. Six members of the audit subcommittee of Enron’s board resigned. Some observers have wondered if the confidence of the investing public can ever be regained.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0073022853/hiL22853_ackler.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Topic 1–2

One important lesson from these scandals is that not only is unethical behavior in business wrong in a moral sense, but it also can be disastrous from the standpoint of the economy. We cannot have businesspeople lying, stealing, perpetrating frauds, and making up accounting rules as they go without seriously disrupting business. Thus, ethical behavior by businesspeople in general, and accountants in particular, is not a luxury or a discretionary “good thing to do.” It is an absolute necessity to the smooth functioning of the economy.

Sorting out the details of the major scandals mentioned above, as well as others, would require a book (or books) in itself and would take us well beyond the subject matter of this text. Most of the purely accounting issues in these cases involve financial accounting (external reporting) rather than managerial accounting (internal reporting). In most companies, however, many of the same individuals are involved in both types of accounting. In the Enron case, for example, which is perhaps the most notorious of all, investigators allege that a massive fraud was perpetrated on the investing public by creating so-called related parties with names like Raptor for the sole purpose of hiding debt and overstating earnings. Yet the same alleged fraud must have been perpetrated on many at Enron itself. Surely not all of the company’s thousands of employees knew of these accounting schemes. So ultimately, what may have been largely financial (external) accounting misstatements, almost certainly resulted in misstated managerial (internal) accounting reports as well.¹³

The chaos in corporate governance and accounting has spawned a movement for reform. Congress passed the Sarbanes-Oxley Act in 2002, which, among other things, requires companies to establish, assess, and regulalry report on their internal controls over financial reporting. This legislation also created the Public Company Accounting Oversight Board (PCAOB), to establish auditing standards and provide for an audit quality review process. Appendix I covers the Sarbanes-Oxley Act and its implications for managerial accounting. (Appendix I, on pages 776 through 781, can be assigned now.)

For many in the accounting profession, the scandals have served as a wake-up call to concentrate more on ethical issues in practicing and teaching accounting.¹⁴ To this end, a significant ethical issue in managerial accounting will be addressed at the end of most chapters. The goal of these Focus on Ethics pieces is to raise the consciousness of students that legitimate ethical issues do arise in the daily practice of managerial accounting. In the last section of this chapter, we will turn our attention to managerial accounting as a profession. In the context of that discussion, the Focus on Ethics piece for this chapter will be a summary of the Institute of Management Accountants’ Statement of Ethical Professional Practice.

Problems  1-31, 1-32

Case  1-33