MANAGEMENT ACCOUNTING: AN OVERVIEW 1

MANAGEMENT ACCOUNTING
Definition

- Involves the application of appropriate techniques and concepts to economic data so as to

assist management in establishing plans for reasonable economic objectives and in making
of rational decisions with a view toward achieving these objectives
- The process of identification, measurement, accumulation, analysis, preparation,
interpretation, and communication of financial information, which is used by management to
plan, evaluate and control activities within an organization.
- Comprises the preparation of financial reports for nonmanagement groups such as
shareholders, creditors, regulatory agencies and tax authorities

Objective of Management Accounting

Management accountants

- Select and provide information to all levels of management, information needed in

1. Planning, evaluating and controlling operations, decision making
2. Safeguarding the organizations assets
3. Communicating with interested parties outside the organization, such as shareholders
and regulatory bodies

- As part of management, participates in the management process

a. The process includes making strategic, tactical and operating decisions and helping to
coordinate the efforts of the entire organization.
b. In assuring that the organization operates as a unified whole in its long-run intermediate
and short run best interests.

Scope of Management Accounting

- Primarily
a. Concerned with providing information to internal managers who are charged with
planning and controlling the operations of the firm and making a variety of management
decisions

- Generally, management accountants do the following tasks

a. Scorekeeping or data accumulation
Enables both internal and external parties to evaluate organizational performance
and position
b. Interpreting and reporting of information
Helps manager to focus on operating problems, opportunities as well as
inefficiencies.
Commonly associated with current planning and control and the analysis and
investigations of recurring routine internal accounting reports to signal
situations in which management action may be required
c. Problem solving
Quantification of the relative merits of possible courses of action as well as
recommendations as to the best procedure.
Commonly associated with non-recurring decisions

- Specifically, management accountant provides a system which allows management to

receive the necessary information used in performing its administrative functions of
a. Planning
Involves setting of goals for the firm, evaluating the various ways to meet the
goals and picking out what appears to be the best way to meet the goals;
 MANAGEMENT ACCOUNTING: AN OVERVIEW 2
b. Controlling
Involves the evaluation of whether actual performance conforms with planned
goals; and
c. Decision making
Involves determination of predictive information (e.g. relevant costs) for making
important business decisions

Planning

- A key activity for all companies

- A plan communicates a companys goals to employees and specifies the resources needed to
achieve them.
- Examples of contributions which accounting can make in:
Resource planning
o Cash budgets
o Capital budgets
o Projected balance sheets
Profit planning
o Break-even analysis
o Projected income statements

Control

- Achieved by evaluating the performance of managers and the operations for which they
are responsible.
- Managers are evaluated
To determine how their performance should be rewarded or punished, which in
turn motivates them to perform at a high level
Performance reports
The reports used to evaluate the performance of managers and the operations
they control
Used to inform managers when activities which are part of their responsibility are
deviating from the plan
Examples:
o Cost variance analysis
o Financial statement analysis
o Gross profit variance analysis
There is no generally accepted method of preparing a performance report
Frequently, such reports involve a comparison of current period performance with
performance in a prior period or with planned (budgeted performance)
May not provide definitive answers but they are still extremely useful.
Managers can use them to flag areas that need closer attention and to avoid
areas that are under control.
Typically, managers follow the principle of management by exception, when
using performance reports.
o Management by exception managers investigate departures from the
plan that appear to be exceptional; they do not investigate minor
departures from the plan.

- Operations are evaluated

To provide information as to whether or not they should be changed (i.e. expanded,
contracted, or modified in some way)
An evaluation of an operation can be negative even when the evaluation of the manager
responsible for the operation is basically positive.
 MANAGEMENT ACCOUNTING: AN OVERVIEW 3
Company plans often play an important role in the control process. Managers can compare actual
results with planned results and decide if corrective action is necessary.

- If actual results differ from the plan,

a. The plan may not have been followed properly,
b. The plan may have not been well thought out, or
c. Changing circumstances may have made the plan out of date

Figure 1.1 Planning and Control Process

Plan
sions to change operations or revise plans
Action taken to implement plan
Results
Once a plan has been made, actions are taken
to implement it. These actions lead to results,
which are compared with the original plan.
Based on this evaluation, managers are:
- Rewarded
o Given substantial bonuses or
o Promoted
if performance is judged to be good
or
-Punished
o Given only a small bonus, or
o Given no bonus, or
o Even fired
If performance is judged to be poor

Also, based on the evaluation process,

operations may be changed.
Changes may consist of:
Decisions to reward or punish
Comparison
managers
of planned results and actual results
-Expanding (e.g. adding a second shift)
- Contracting (e.g. closing a production plant)
- Improving operations (e.g. training
employees to do a better job answering
customer product inquiries)
- Revising an unrealistic plan
Evaluation
Thus, accounting serves management at all
stages of the management process, from the
formulation of objectives and so on up to the
feedback of performance information which in
Decision Making turn helps in the reformulation of objectives

- An integral part of the planning and control process

- Decisions are made to
a. reward or punish managers, and
b. to change operations or revise plans
- Examples:
a. Should a firm add a new product?
b. Should it drop an existing product?
c. Should it manufacture a component used in assembling its major product or contract
with another company to produce the component?
d. What price should a firm charge for a new product?
- How well they make these decisions will determine future profitability, and possibly, the survival
of the company.

Comparison of Financial Accounting and Managerial Accounting

Financial Accounting Management Accounting

Definition Involves the systematic recording of Concerned with providing financial
business transactions, governed by a body information to persons within the
of generally accepted accounting organization to enable them to make
principles (GAAP) leading to the informed judgments and effective
 MANAGEMENT ACCOUNTING: AN OVERVIEW 4
preparation of financial statements for the decisions which further the organizations
use of various interested parties, internal goals
as well as external
As to objective To provide data for both internal To provide data for internal users within
(management) and external users (e.g. the business organization.
creditors, owners, government, etc.)
Aimed primarily at external users which Aimed primarily for internal users who
need information to make investment, need information for planning, control and
lending and regulation decisions decision making
As to compliance Should be recorded and presented in Need not be presented in conformity with
with GAAP accordance with GAAP GAAP to be able to present more useful
data to management.
If a managerial accountant believes that
deviating from GAAP will provide more
useful information to internal managers,
GAAP need not be followed
As to emphasis on Primarily provides summaries of past Has a strong future orientation
the future financial transaction
As to relevance and All-purpose reports with historical data are Special reports containing both historical
flexibility of data prepared for use of different parties and projected data are prepared to meet
the needs of specific users. They contain
information, quantitative and qualitative,
that are relevant for a particular decision
Examples of nonmonetary data:
- Material consumed in production
- Number of hours worked by office
staff
- Number of product defects
Presents information in a highly More detailed information.
summarized form. Example:
Example: Information about the cost of operating
Net income is presented for the company individual departments in addition to the
as a whole. cost of operating the company as a whole
As to emphasis on Reports are still useful even if submitted Timeliness is often more important than
precision and late and show summaries of financial precision to managers. Prompt
timeliness of report consequences of actual and past activities submission of the report is necessary to
where precision is required preserve its usefulness and good
estimates may be enough to make good
decisions
As to reporting Primarily concerned with reporting for the Focuses reporting on the parts or
requirements of an company as a whole segments (i.e. product line, sales,
organization territories, divisions, departments) of the
company
As to requirement Required by law as exemplified by the Not mandatory
for compliance with report requirements of the BIR< SEC and
law other governmental entities

Similarities between Financial and Managerial Accounting

Financial accounting reports are aimed primarily at external users, and managerial accounting reports are
aimed primarily at internal users. However, managers also make significant use of financial accounting reports,
and external users occasionally request financial information that is generally considered appropriate for
internal users.

Example:

Creditor may ask management to provide them with detailed cash-flow projections.

Relationship between Management Accounting and Cost Accounting

 MANAGEMENT ACCOUNTING: AN OVERVIEW 5
Cost accounting

- A systematic set of procedures for recording and reporting measurements of the cost of manufacturing
goods and performing services in the aggregate and in detail. It includes methods for recognizing,
classifying, allocating, aggregating and reporting such costs and comparing them with standard costs.

Management accounting is a newer interest of cost accounting. Its purpose is to provide managers with
information which aids decision. There are no generally accepted principles which specify how
management accounting information is to be reported. While systems such as direct costing and
standard costing exist in management accounting, each accounting report should be tailored to the
needs of the decision and the decision maker.

The most effective systems result when the manager-decision maker and the accountant work together
until the accountant understands the decision to be made and the manager understands the source of
information that the accountant will report.

Activities of Management Accountants

Managers of line function

- Concerned with the primary operating activities of the organization manufacturing (or buying) and
selling a physical product or performing a service.

Staff manager

- Manages a department that serves other departments.

- Example:
o Financial managers obtain the cash to keep operations running smoothly
o Manager of legal department advises other managers regarding the legal ramifications of actions

Accounting is a staff function, with management accountants providing information to other managers.
Information can relate to:
- Financial statements
- Tax problems
- Dealings with governmental authorities
- Other matters

The management accountant, like other staff managers, often recommends courses of action to those using
the information.

But neither the management accountant, nor any other staff manager, can impose recommendations on line
managers. Nevertheless, because of their expertise, staff managers can influence decisions. Staff managers,
like all managers, also manage their own departments.

Management accountants discharge their responsibilities and achieve their objectives by organizing and
implementing activities in the following categories:

1. Planning
o Involves quantifying and interpreting the effects on the organization of planned transactions and
other economic events
o Which includes strategic, tactical and operating aspects, requires that the accountant provide
quantitative historical and prospective information to facilitate planning? It includes:
Participation in developing the planning system
Setting obtainable goals
Choosing appropriate means of monitoring the progress toward the goas
2. Reporting
o Relates to both internal and external needs for information about past of future events and
circumstances.
o Management accountants make available to managers timely reports that provide information and
perspective necessary for them to make decisions in a goal congruent manner.
o Reports may concern financial, physical, and human resources and the markets and regulatory
environments in which entities operate. In addition to reporting internally, management accountants
 MANAGEMENT ACCOUNTING: AN OVERVIEW 6
make appropriate information available to shareholders, creditors, and governmental regulatory
agencies and tax authorities.
3. Controlling
o Management accountants must understand both the sources and uses of the information. This
involves:
o Judging implications of historical and expected events and
o Helping to choose the optimum course of action.
o Evaluating includes translating data into trends and relationships. Management accountants
must communicate effectively and promptly the conclusion derived from the analyses.
o Management accountant assures the integrity of financial information concerning an
organizations activities and resources; monitoring and measuring performance and inducing
any corrective actions required to return the activity to its intended course.
4. Resource management
o This involves implementing a system of reporting that is aligned with organizational
responsibilities.
o Management accountants must provide an accounting and reporting system that will
accumulate and report appropriate revenues, expenses, assets, liabilities, and related
quantitative information to managers. Managers then will have better control over these
elements.
o Management accountants must establish systems which facilitate planning and control of the
organizations resources to ensure that their use is consistent with established policies. These
systems also should meet the needs of management, investors, creditors, and other interested
parties. Some of these needs are:
Custody and management of working capital, including credit and collections and
inventory management
Creating and maintaining the most appropriate debt and equity capital structure
Developing and implementing a system to control plant, property, and equipment
Administering a pension or similar plan
Tax planning and compliance
Insurance management
Creating and operating a system of internal accounting control that can detect misuses
of assets, taking into account the cost/benefit aspects of the control system
5. Information systems development
o The information system must meet the needs of all people who require information to perform
their jobs.
o Management accountants must ensure that the system meets varying needs.
Example:
o Managers responsible for sales of a particular product might need weekly sales
reports for each territory.
o Their supervisor, who also supervises other sales managers, might need only a
weekly report for a group (or line) of products.
o The chief sales executive might want only monthly, not weekly reports of sales by
product groups and sales territories.
o Design and development of the overall management information system implies:
Determining the output required by users
Specifying the data inputs needed to obtain the required output
Developing the requirements for a processing system that converts input to output
Managing and securing the data bases
6. Technological implementation
o Management accountants should be familiar with current technology relative to information
processing and the accounting techniques appropriate to controlling and using the information
o Examples:
Computer applications
o Basic accounting functions and database management
o Techniques in financial planning and decision making, such as models for
optimizing asset utilization and resource allocation
Network and communication systems
o Computers usually record transactions in journal and ledgers.
o Accountants are responsible for supervising the gathering of data and for monitoring the
system, making sure it functions as intended and is used appropriately.
 MANAGEMENT ACCOUNTING: AN OVERVIEW 7
o Regular, periodic reporting is the heart of management accountants work in many
organizations.
One of the challenges here is ensuring that other managers receive relevant information
and are not overwhelmed by irrelevant information.
7. Verification
o Management accountants
assure the accuracy and reliability of information derived from the accounting system or
related sources that is used throughout the organization.
must be satisfied that actions taking place throughout the entity are consistent with
policies of the organization.
Both of these activities use the internal control system and are reviewed by internal
audit.
8. Administration
o Includes development and maintenance of an effective and efficient management accounting
organization.
This organization addresses and resolves issues relevant to the accounting and financial
structure such as:
o Assignment of management accounting responsibilities
o Interface between accounting and other operations
o Delegation of authority and determinations relevant to centralization or
decentralization
o Recruiting, training and developing personnel in the various areas of
responsibility
o Separation of duties
Other important administrative activities performed by management accountants include
the development and maintenance of:
o Accounting policy and procedure manuals
o A cost-effective records management program
o Records adequate to meet the requirements of tax laws, other laws and
regulatory agencies, and independent auditors

Operation Processes
The operation processes that are inherent throughout the range of activities described above include:

1. Identification recognition and evaluation of business transactions and other economic events for
appropriate accounting action.
2. Measurement quantification, including estimates, of business transactions or other economic events
that have occurred or forecasts of those that may occur
3. Accumulation disciplined and consistent approaches to recording and classifying appropriate
business transactions and other economic events
4. Analysis determination of the reasons for the reported activity and its relationship with other
economic events and circumstances
5. Preparation and interpretation meaningful coordination of accounting and/or planning data to
provide information, presented logically, and including, if appropriate, the conclusions drawn from those
data
6. Communication reporting pertinent information to management and others for internal and external
users

Organization Structure and the Management Accountant

- Management accounting is intended to include persons involved in such functions as controllership,

treasury, financial analysis, planning and budgeting, cost accounting, internal audit, systems, and
general accounting.
 MANAGEMENT ACCOUNTING: AN OVERVIEW 8
- Management accountants thus may have titles as financial director, chief financial officer, vice president
for finance, controller, treasurer, budget analyst, cost analyst, and accountant, among others.

Line and Staff Relationship

Line authority

- The authority to command action or give orders to subordinates

- Line managers
Directly responsible for attaining the objectives of the business firm as efficiently as possible.
Example:
o Sales manager
o Production manager

Staff authority

- The authority to advise but not command others;

- Exercised laterally or upward.
- Staff managers
Give support, advice and service to line departments.
Examples:
o Personnel
o Purchasing
o Engineering
o Finance
- Accounting function is usually staff with responsibility for providing line managers and also other staff
managers, with specialized services. This includes advice and help in the areas of:
Budgeting
Controlling
Pricing
Special decisions

Theoretically, the controller transmits the best accounting procedures to be followed by the line people to the
president who will communicate such through a manual of instructions. In practice however, the controller
holds delegated authority from top line management to direct the line people how to apply these procedures.
This is known as functional authority which is the right to command action laterally or downward with regard to
a specific function or specialty.

The Chief Financial Officer and the Controller

Chief Financial Officer (CFO)

- also called the finance director in many countries

- the executive responsible for overseeing the financial operations of an organization.
- Responsibilities
Controllership includes providing financial information for reports to managers and reports to
shareholders and overseeing the overall operations of the accounting system
Treasury includes banking and short and long term financing, investments, and management of
cash
Risk management includes managing the financial risk of interest-rate and exchange-rate
changes and derivatives management
Taxation includes income taxes, sales taxes, and international tax planning
Internal audit includes reviewing and analyzing financial and other records to attest to the
integrity of the organizations financial reports and to adherence to its policies and procedures
In some organizations, the CFO is also responsible for information systems. In some
organizations, it is the CIO or Chief Information officer who is responsible for information
systems.

Controller

- Also called the chief accounting officer

- The financial executive primarily responsible for management accounting and financial accounting.
 MANAGEMENT ACCOUNTING: AN OVERVIEW 9
- Modern controllers do not do any controlling in terms of line authority except over their own
departments.
- Yet the modern concept of controllership maintains that the controller does control in a special sense.
That is, by reporting and interpreting relevant data (problem-solving and attention-directing roles),
the controller exerts a force or influence that impels management toward making better-informed
decisions.

Figure 1.2 is an illustrative organization chart of the CFO and the corporate controller of an apparel company.

Figure 1.2 Reporting Relationships for the CFO and the Corporate Controller

Chairman
: Chief Executive Officer (CEO) Board of Directors

President
Chief Operating Officer (COO)

Chief Financial Officer (CFO)

Investor Relations
Risk Management Financial Planning
Controller Audit Tax Treasury

Controllership

Definition

- The practice of the established science of control which is the process by which management assures
itself that the resources are procured and utilized according to plans in order to achieve the companys
objectives.

The Controller as the Top Management Accountant

Controller

- An integral part of the top management team

- Provides reports for planning and evaluating company activities (e.g. budgets and performance reports)
and
- Provides the information needed to make management decisions (e.g. decisions related to construction
of a new factory or decisions related to adding or dropping a product)
- Has responsibility for all financial accounting reports and tax filings with the Bureau of Internal Revenue
and other taxing agencies, as well as coordinating the activities of the firms external auditors.

Controller
Figure 1.3. Organizational Chart for the Controllers Office

Budgeting and Performance

Financial
Reporting
Analysis and Special Studies
Financial Reporting Cost Accounting

Systems Development
Taxation Reporting
 MANAGEMENT ACCOUNTING: AN OVERVIEW 10

Note: one of the areas reporting to the controller is cost accounting. Most medium-sized and large
manufacturing companies have such a department. Cost accountants estimate costs to facilitate management
decisions and develop cost information for purposes of valuing inventory.

If one wants a high-level career in management accounting, he/she will need not only strong accounting skills
but also skills required of all high-level executives. These skills include:

- Excellent written and communication skills

- Solid interpersonal skills
- Deep knowledge of the industry in which the firm operates.

Treasurer

- Has custody of cash and funds invested in various marketable securities.

- Generally responsible for maintaining relationships with investors, banks and other creditors.
- Plays a major role in managing cash and marketable securities, preparing cash forecasts and obtaining
financing from banks and other lenders

Both the controller and the treasurer report to the chief financial officer (CFO) who is the senior executive
responsible for both accounting and financial operations.

Basic Functions of Controllership

1. Planning. Establish and maintain an integrated plan of operation consistent with the companys goals
and objectives, both short and long term, analyzed and revised, as required, communicated to all levels
of management, with appropriate systems and procedures installed.
2. Control. Develop and revise standards against which to measure performance and provide guidance
and assistance to other members of management in insuring conformance of actual results to
standards.
3. Reporting. Prepare, analyze and interpret financial results for utilization by management in the
decision making process, evaluate the data with reference to company and unit objectives; prepare and
file external reports as required to satisfy government regulatory bodies, shareholders, financial
institution, customers, and the general public.
4. Accounting. Design, establish, and maintain general and cost accounting systems at all company
levels, including corporate, divisional, plant, and unit to properly record all financial transactions in the
books of accounts and records in accordance with sound accounting principles with adequate internal
control.
5. Other primary responsibilities. Manage and supervise such functions as taxes, including interface
with the respective taxing authorities and agents; maintain appropriate relations with internal and
external auditors; institute insurance programs, coverage, records and provision; develop and maintain
systems and procedures; develop record retention programs; supervise assigned treasury functions;
institute investor and financial public relations programs; office management; and direct other assigned
functions.

As circumstances may warrant, there may be many deviations from the basic functions just described.

Qualification of the Controller

1. An excellent technical foundation in accounting and finance with an understanding and thorough
knowledge of accounting principles
2. An understanding of the principles of planning, organizing and control
 MANAGEMENT ACCOUNTING: AN OVERVIEW 11
3. A general understanding of the industry in which the company competes and the social, economic, and
political forces involved
4. A thorough understanding of the company, including its technologies, products, policies, objectives,
history, organization, and environment.
5. The ability to communicate with all levels of management and a basic understanding of the other
functional problems related to engineering, production, procurement, industrial relations, and marketing.
6. The ability to express ideas clearly in writing or in making informative presentations
7. The ability to motivate others to achieve positive action and results

The controller must be fair, reasonable and sincere with all concerned if he is to be recognized for the
importance of the controllership function.

As in any executive position, the controller must be able to work with people at all levels, have respect for the
ideas and opinions of others, and have the resourcefulness to meet all challenges.

Professional Ethics

The Institute of Management Accountants (IMA) of the United States has developed a very useful ethical code
called the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management. Even though the standards were specifically developed for management accountants, they have
much broader application.

Figure 1.4 Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management

Practitioners of management accounting and financial management have an obligation to the public, their profession, the
organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this
obligation, the Institute of Management Accountants has promulgated the following standards of ethical conduct for
practitioners of management accounting and financial management. Adherence to these standards, both domestically and
internationally, is integral to achieving the Objectives of Management Accounting. Practitioners of management accounting
and financial management shall not commit acts contrary to these standards nor shall they condone the commission of such
acts by others within their organizations.

Competence. Practitioners of management accounting and financial management have a responsibility to:

Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.
Perform their professional duties in accordance with relevant laws, regulations and technical standards.
Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable
information.

Confidentiality. Practitioners of management accounting and financial management have a responsibility to:

Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless
legally obligated to do so.
Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work
and monitor their activities to assure the maintenance of that confidentiality.
Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or
illegal advantage either personally or through third parties.

Integrity. Practitioners of management accounting and financial management have a responsibility to:

Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.
Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.
Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.
Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical
objectives.
Recognize and communicate professional limitations or other constraints that would preclude responsibility
judgment or successful performance of an activity.
Communicate unfavorable as well as favorable information and professional judgments or opinions.
Refrain from engaging in or supporting any activity that would discredit the profession.
 MANAGEMENT ACCOUNTING: AN OVERVIEW 12
Objectivity. Practitioners of management accounting and financial management have a responsibility to:

Communicate information fairly and objectively.

Disclose fully all relevant information that could reasonably be expected to influence an intended users
understanding of the reports, comments, and recommendations presented.

Resolution of Ethical Conduct. In applying the standards of ethical conduct, practitioners of management accounting and
financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When
faced with significant ethical issues, practitioners of management accounting and financial management should follow the
established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical
conflict, such practitioner should consider the following courses of action:

Discuss such problems with the immediate superior except when it appears that the superior is involved, in which
case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot
be achieved when the problem is initially presented, submit the issues to the next higher managerial level.
If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a
group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact
with levels above the immediate superior should be initiated only with the superiors knowledge, assuming the
superior is not involved. Except where legally prescribed, communication of such problems to authorities or
individuals not employed or engaged by the organization is not considered appropriate.
Clarify relevant ethical issues by confidential discussion with an objective advisor (e.g., IMA Ethics Counseling
Service) to obtain a better understanding of possible courses of action.
Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
If the ethical conflict still exists after exhausting all levels of internal review, there may be no other recourse on
significant matters than to resign from the organization and to submit an informative memorandum to an appropriate
representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be
appropriate to notify other parties.

There are two pats to the standards.

First part

- provides general guidelines for ethical behavior.

- In a nutshell, the management accountant has ethical responsibilities in four broad areas namely
1. To maintain a high level of professional competence,
2. To treat sensitive matters with confidentiality,
3. To maintain personal integrity, and
4. To be objective in all disclosing.

Second part

- Gives specific guidance concerning what should be done, if an individual finds evidence of ethical
misconduct within an organization

The ethical standards provide sound, practical advice for management accountants and managers. They
require professional behavior, especially in avoiding conflicts of interest. They require management
accountants to bring bad news to the attention of their supervisors, and to work competently.

Most of the rules in the ethical standards are motivated by a very practical consideration if these rules were
not generally followed in business, then the economy could come to a halt.

Examples of the consequences of not abiding by the standards:

1. Suppose employees could not be trusted with confidential information. Top managers would therefore
be reluctant to distribute confidential information within the company. This could result to decisions
being made based on incomplete information and could lead to deterioration of operations.
2. Suppose employees accept bribes from suppliers. Then contracts would tend to go to suppliers who
pay the highest bribe rather than to the most competent suppliers. Would you like to fly in an airplane
whose wings were made by the subcontractor who was willing to pay the highest bribe to a purchasing
agent?
 MANAGEMENT ACCOUNTING: AN OVERVIEW 13
3. Suppose the CEOs or presidents of companies routinely lied in their annual reports to shareholders and
grossly distorted financial statements. If the basic integrity of the companys financial statement could
not be relied on, investors and creditors would have little basis for making informed decisions. Rational
investors would suspect the worst and would pay less for securities issued by companies. As a result,
less funds would be available for productive investments and many firms might be unable to raise any
funds at all. This ultimately, would lead to slower economic growth, fewer goods and services, and
higher prices.

As these examples suggest, if ethical standards were not generally adhered to, there would be undesirable
consequences for everyone.

Company Codes of Conduct

Ethical standards serve a very important practical function in an advanced market economy. Without
widespread adherence to ethical standards, material living standards would fall. A former president of CMA
emphasizes the importance of ethics in business:

Employees like to work for a company that they can trust. Customers like to deal with an ethically reliable
business. Suppliers like to sell to firms with which they can have a real partnership. Communities are more
likely to cooperate with organizations that deal honestly and fairly with them. If the business community is to
function effectively, all of the players need to act ethically.

It is unfortunate though, that some companies place so much emphasis on short-term profits that may make it
seem like the only way to get ahead is to act unethically.

Those who engage in unethical behavior often justify their actions with one or more of the following reasons:

1. The organization expects unethical behavior

2. Everyone else is unethical, and/or
3. Behaving unethically is the only way to get ahead.

To counter the first justification for unethical behavior, many companies have adopted formal ethical codes of
conduct.

Formal ethical codes of conduct

- generally broad-based statements of a companys responsibilities to its employees, its customers, its
suppliers and the community in which the company operates.
- Give broad guidelines rather than that spell out specify dos and donts or suggest proper behavior in a
specific situation.
- Companies with strong code of ethics can create strong customer and employee loyalty.

Typical Ethical Challenges

Ethical issues can confront management accountants in many ways.

Examples:

Case A.

Roger Cruz, a management accountant, knows that reporting a loss for a software division will result in yet
another series of layoffs, and has concerns about the commercial potential of software for which R & D costs
are currently being capitalized as an asset rather than being shown as an expense for internal reporting
purpose. The division manager argues that the new product will be successful and profitable but presents little
evidence to support her argument. The last two products from this division have been unsuccessful. The
management accountant has many friends in the division and wants to avoid a personal confrontation with the
division.

Case B.

A packaging supplier, bidding for a new contract, offers the management accountant of the purchasing
company an all-expense paid weekend to the Boracay Resort. The supplier does not mention the new contract
when giving the invitation. The accountant is not a personal friend of the supplier. He knows cost issues are
 MANAGEMENT ACCOUNTING: AN OVERVIEW 14
critical in approving the new contract and is concerned that the supplier will ask for details about bids by
competing packaging companies.

Interpretation:

- In both cases, the management accountant is faced with an ethical dilemma.

Case A

- involves competence, objectivity and integrity.

- Management accountant should request that the division manager provide credible evidence that the
new product is commercially viable.
- If the manager does not provide such evidence, expensing R & D costs in the current period is
appropriate.

Case B

- Involves confidentiality and integrity.

- Ethical issues are not always clear-cut.
- The supplier in Case B may have no intention of raising issues associated with the bid.
- However, the appearance of a conflict of interest in Case B is sufficient for many companies to prohibit
employees from accepting favors from suppliers.
- Figure 1.4 includes IMAs guidance on Resolution of Ethical Conflict.
- The accountant in Case B should discuss the invitation with his immediate supervisor.
- If the visit is approved, the supplier should be informed that the invitation has been officially approved
subject to his following corporate policy (which includes the confidentiality of information).

Codes of Conduct on the International Level

July 1990 - The International Federation of Accountants (IFAC) in which the Philippines through the PICPA is
a member, issue the Guidelines on Ethics for Professional Accountants which governs the activities of all
professional accountant throughout the world; regardless of whether they are practicing as independent CPAs,
employed in government service or employed as internal accountants.

- In addition to outlining ethical requirements in matters dealing with competence, objectivity,

independence, and confidentiality, the IFACs code also outlines the accountants ethical responsibilities
in matters relating to taxes, fees and commissions, advertising and solicitation, the handling of monies
and cross border activities.
- Where cross-border activities are involved, the IFAC ethical requirements must be followed if these
requirements are stricter than the ethical requirements of the country in which the work in being
performed.

The Board of Accountancy of the Professional Regulation Commission approved the implementation of the
new Code of Ethics for Professional Accountants in the Philippines effective January 1, 2004.

Institute of Management Accountants (IMA)

- The principal organization of management accountants in the United States

- A professional organization that publishes the monthly magazine Strategic Finance.
- Since 1973, has conducted a comprehensive examination to test the knowledge a management
accountant must have to be successful in a complex and fast-changing business world.
- More than 3,000 individuals take the exam each year. Those who pass are issued a Certificate in
Management Accounting and are proud to indicate the designation CMA on resumes and business cards.
- Instituted a program to provide certifications for management accountants and financial managers.
- Certified Management Accountant (CMA) examination
First given in 1972.
Examination consists of the following four parts
o Economics, Finance and Management,
o Financial Accounting and Reporting,
o Management Reporting, Analysis and Behavioral Issues, and
 MANAGEMENT ACCOUNTING: AN OVERVIEW 15
o Decision Analysis and Information Systems
- Certified in Financial Management (CFM) examination
First given in 1996
Similar to the CMA examination with one major difference: the Financial Accounting and Reporting
section is replaced with Corporate Financial Management.

Philippine Association of Management Accountants (PAMA)

- Established in 1972 as the National Association of Accountants (NAA) Philippine Chapter, Inc.
- Affiliated with NAA in New York.
- Founded primarily to provide its members with educational and professional activities that supplement in
the knowledge of management accounting practices and methods.
- Monthly technical meetings, seminars and workshops are held to present relevant and current topics by
leading speakers from the government, private and educational sectors.
- Publication of technical materials is also part of the Associations efforts to service its members.

To propagate and professionalize Management Accounting in the Philippines, PAMA conducts the Certificate in
Management Accounting (CMA) Program through its continuing education arm, the Philippine Institute of
Management Accounting (PIMA). Basic objectives of the program are:

1. To establish management accounting as a recognized profession by identifying the role of the

management accountant and the underlying body of knowledge, and by outlining a course of study by
which such knowledge can be acquired
2. To foster higher educational standards in the field of management accounting
3. To assist employees and students by establishing an objective measure of an individuals knowledge
and competence in the field of management accounting.