eon E Sesion E:Profsional Eshies Professional Ethics ‘The Institute of Management Accountants’ Statement on Management Accounting (SMA) “Values and Ethics: From Inception to Practice” addresses the needs and rewards ‘for organizations that take a pro-active stance in creating and maintaining an ethical culture. The SMA states that, “All accounting professionals [should be] aware of their responsibility to act as change agents within their organizations, supporting the maintenance of effective controls and ensuring that their organizations have considered, adopted, and fully implemented a company-wide ethics and compliance program, including a code of ethics and a confidential hot helpline.” This SMA, which appears on IMA’s website, is the basis ofthis section of the CMA exam. ‘There are five primary categories for mariagement to focus on in order to effectively maintain the desired ethical atmosphere: * Defining values * Leadership by example * Ethics and internal controls * Practical application = Measuring and improving ethical compliance Inaddition, no company operates in a vacuum. Therefore, it is essential to understand the difference between acts that are legal and those that are ethical Note: The ethics section in Part 2 of the CMA exam addresses the subject rom the perspective of an organization and in particular, how organizations use IMA’s SMA titled “Values and Ethics: From Inception to Practice.” In contrast, the ethics coverage in Part 1 of the CMA exam covers ethics from the perspective of the individual. Students should be aware of and focused on the different perspectives being covered in each part of the exam, Be sure to carefully review the LOS related to ethics for each part. (CMALS Past 2: Financial Decision Making, Version 3.0, 0 (© 2009 Insite of Management Accountants. Allvights reserved. |Sacion E, Topic I: Ethical Consideration the Organisation Ethical Considerations for the Organization “Ethics is about the integrity of the decision making process that is used to resolve any number ofissues,” according to the Statement on Management Accounting (SMA) “Values and Ethics: From Inception to Practice. ” At its lowest denominator, ethics is about behavior; more specifically for the organization itis the ability to predict and control employees’ behavior to ensure that the company’s values and business purpose are being consistently met. ~ Read the Learning Outcome Statements (LOS) for this topic as found in Appendix B | and then study the concepts presented here to be sure you understand the content you could be tested on in the CMA exam. Corporate Responsibility for Ethical Conduct an Too often in recent years, top executives accused of unethical behavior state under cath that they are innocent of any wrongdoing. Despite the fact that companies may employ many thousands of employees, the organization still has a responsibility to ensure, to the best of its ability, that all of those employees are behaving in an ethical manner. To achieve control, the organization defines the principles of behavior it desires by identifying and documenting the organizational values, creating codes of ethics and conduct, and implementing internal controls. All of these documents work together to provide guidance in decision making and selecting daily behavioral choices. This guidance, according to the Statement on Management Accounting (SMA) “Values and Ethics: From Inception to Practice,” is a “critical element in the creation of a framework for ethical management.” Ultimately these documents create and maintain an ethical culture that actively supports the types of behavior the organization desires. ‘The size of the organization wili determine how extensive each of these documents will be. In general, the larger the company, the more well-defined expected conduct will need to be. In smaller companies that are run by the founder, leading by example can frequently be as effective at creating an ethical culture as extensive documentation. However, as these smaller companies grow, there is a danger of diluting the culture as the founder becomes less and less accessible. Therefore, itis important for even small companies to document their values and behavioral expectations of employees. Fortunately, there are many benefits to the organization for making this effort. It can take years for an organization to build up a reputation for quality or reliability. Yet, the individual behavior of a few or even a single employee can very quickly destroy an organization’ reputation. ‘Therefore, companies who take corporate ethical responsibility seriously usually experience improvement in share value, client retention, and attraction of new clients, investors, and employees. In addition they experience a lowered risk of compliance violations (MALS Part2: Financial Decision Making, Version 3.0 © 2009 instame of Management Accountants. All igs eserved. a U i i wooo oDj Sesion E, Tope: hia Considerations the Organization Research has also shown that strong ethical cultures can impact the bottom line. Improvements like higher levels of productivity, improved interpersonal dynamics, and ower risks of fraud all result in better financial performance for the organization. According to IMA's SMA,,“Values and Ethics”: Organizations that succeed in a broad-based deployment of a code of ethics will create a base for enhanced risk assessment, greater transparency for those responsible for organizational governance, and an increased probability that commitments made in words are truly being fulfilled in practice. As a result, CEOs and CFOs who are required sign commitments of compliance will do so with a greater degree of knowledge and certainty that their words and the actions of the organization are aligned. Because working within the letter of the law does not guarantee that individuals are behaving ethically, ethical behavior goes beyond the idea of following legally acceptable procedures. Individuals and organizations behave ethically when their actions are aligned with a set of core values. The challenge for most organizations is that each employee comes into the company with his or her own predefined set of values. For the organization to present a unified presence to customers, shareholders, vendors, the community and all other stakeholders, it is essential for the organization to define its core values as they relate to the business in which they are involved. In this manner, all employees are provided with the unifying guidance they require to make ethical choices aligned with corporate values. Ethics Starts at the Top Ideally everyone in an organization from the board of directors to the CEO to the front line worker will answer the following questions in a similar manner: * What values does this organization believe in? * What principles drive this organization's decision making? + By what ethical standards does this organization live? + What principles/beliefs do managers and leaders demonstrate? ‘These questions are the basis for articulating a cohesive code of conduct. Once the values of the organization 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. These principles then provide a framework for ethical management and leadership. Because they are broadly written, these short statements may still be interpreted differently by individuals. Therefore, the next step is for senior management to expand each principle into a more specific behavioral profile, The expanded statement would include examples of what type of behavior exemplifies this principle as well as what type of behavior is inconsistent with this principle. The goal is to create a concrete foundation that can be used to guide operational decisions on a daily basis. For these principles to become a part of the organizational culture, itis imperative that senior management fully understand the implications that will arise during operational RoR RTS (CMALS Part 2: Financial Decision Making, Version 3.0 an , © 2008 Insiuie of Management Accountants. Alright reserved.Seon E, Topic I EthialConseraions forthe Organization 3 implementation. If the principles cannot be implemented consistently, or if they inadvertently create an environment that is untenable, the end result will be confusion and conflict. In the absence of a defined code of conduct or ethics, employees will either follow their own beliefs and values, or they will look for guidance from leadership to determine the expected course of action. Therefore, itis essential that management hold itself to a higher standard of conduct than they expect from those they supervise. To be effective, ‘managers will set a good example, follow documented values, keep all promises and commitments, and provide an atmosphere conducive to helping others to adhere to the existing ethics standards. Applying Ethics in a Corporate Setting 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. A company’s employees are truly its most important asset when creating an ethical culture. It is not enough for management to hold itself to a higher level of conduct. [fan organization wants to create a climate where “doing the right thing” is the norm, then it is important to hire the right people, provide them with adequate training, and then practice consistent values-based leadership. ‘The process begins with hiring employees. During the interview process, potential candidates should be screened for personal values and expected workplace behaviors as well as skills and aptitudes. While values are amorphous and difficult to measure, they can be inferred by asking about personal values, using open ended interview questions about how they would respond to specific circumstances, or inquiring whether certain actions would be considered ethical. Because of the importance of bringing in only the right people, and the potential cost of hiring and then firing those who behave unethically, the SMA states that, “management accountants should censure that part of the HR budget is allocated for conducting thorough behavioral analysis and that in-depth assessment is mandatory in the case of sensitive positions.” Once the “right” employees have been hired, training is the next priority. Orientation should contain information specific to the organization's values and any existing codes of conduct or ethics. To regularly reaffirm these beliefs, ongoing training should be provided to all staff. Training programs should be comprehensive, relate to “real ‘world” situations faced by employees, and provide a consistent message. Employee training is a key part of maintaining 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. ‘The training should also translate the high-level comporate-wide ethics statement into expected behavior for specific positions. This makes the code of ethics easier to understand, more memorable, and more likely to be lived. (MALS Part2: Financial Decision Making, Version 3.0 _ (© 2009 Instinte of Management Accountant. All rights reserved. =a mew mo oo co am me oD ee OR CEN ~S8 = op ap aoi | Secon E, Topic I Ethical Consideration forthe Organization ‘The SMA specifies that ongoing training should include the following expectations: * General employee behavior and personal conduct * How ethics are built into work management methods + How ethics affects specific jobs, processes, activities, and relationships + How the organization monitors compliance with code + What routes are open to employees who have compliance issues + Whataction is taken when a complaint or issue is identified + The actions and penalties once noncompliance is proven Consistent, values-based leadership not only models the desired behaviors for staff, it also translates high-level ethical statements into operational examples appropriate to be applied to day-to-day responsibilities. For example, the statement “We believe that all people have the right to be treated with dignity and respect” conveys a principle. To apply this principle, the management accountant would discuss with his or her staff how it applies when they are performing tasks like requesting documentation, collecting receivables, and educating non-financial staff members about financial issues. General ethics training is valuable in creating overall awareness, but most employees are more interested in learning about behavioral issues specific to their position and responsibilities. An organization's culture is made up of the accumulated behavioral actions of all of its employees over time. A culture that is in alignment with the organization's core values and code of ethics will tend to strengthen and reproduce the desired ongoing behaviors. This is illustrated by a culture where everyone from a top executive to an entry-level employee understands, shares, and lives the same set of values. It is the synergy of everyone acting in alignment with values that will result in increased productivity, lower risks of fraud, and improved financial results. Measuring and Improving Ethical Compliance (OMALS Part 2: Financial Decision Making, Version 3.0 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 compfiance a core clement of its mainstream governance and accountability framework, {Values and Ethics”] Legal and regulatory mandates may serve as a deterrent to unethical behavior. However, management is responsible for instituting internal controls and operational transparency. Because “you cannot manage what you cannot measure,” the certification by an organization’ CEOs and CFOs that interhal controls are adequate (as required under Sarbanes Oxley) constitute a large part of an organization's ethical compliance framework. © 2009 Insitute of Manaysement Accowutants Al rights reserved, m4 oe gre RESeton E, Topi : Ethical Considerations or the Organization a5 Internal controls provide a framework for identifying and controlling the risks that exist within an organization. They can also be used to assess the amount of risk to which an organization is exposed. Internal controls and an ethical culture are, necessarily, closely related. Internal controls that are in alignment with company values serve to strengthen the culture. At the same time, a vibrant ethical culture provides a strong foundation that compels employees to follow internal controls. ‘Therefore, an effective internal control system becomes an integral part of the organizational culture. There are various tools available w measure and improve compliance with ethical values, including: the human performance feedback loop, survey tools, and a whistle- blowing framework. Human Performance Feedback Loop 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 Employee reviews, conducted annually (or more frequently) should evaluate the individual's compliance with ethical expectations, along with operational goals. For example, an evaluation might rate not only accuracy and timeliness of an employee's reports; it could also 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. ‘The human performance feedback loop should also measure the number of employees completing ethics training and their score on any required testing, Survey Tools Another useful way to measure ethical performance is the use of surveys. Using the organization's code of ethics as a source, surveys could have employees rate how well the organization is doing. For example, employees may be asked the degree to which they agree with statements such as: “This organization respects the dignity of all individuals.” The results of surveys will indicate the degree of compliance, as well as provide a method to stimulate an ongoing dialogue with employees. Whistleblowing Framework A “whistleblower” framework provides employees who identify ethically questionable behavior by others with a confidential way to seek advice and report ethical violations. Research has shown that employee "hot-lines” are a valuable reporting mechanism for discovering fraud within an organization. If the hot-line is truly anonymous and can also be used by an employee to access advice on ethical situations, then employees can more freely raise issues without fear of retaliation. A further benefit of implementing a whistle blowing framework is the ability to collect, analyze, and summarize existing and potential ethical problems. This information is essential for identifying opportunities to improve training and internal controls. According to the SMA, “Management accountants need to ensure that such processes MALS Par 2: Financial Decision Making, Version 30 2009 Insti of Management Accountants, All rights reserved. j } i f i