ethics - cma part 2

In The Name of God The Beneficent The Merciful

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o 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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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.

o 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.

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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.

o 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.

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o 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.

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o 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.

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.

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o Competence

o Each member has a responsibility to:

1) Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

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.

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o Confidentiality


1) Keep information confidential except when disclosure is authorized.

2) Inform all relevant parties regarding appropriate use of confidential information.

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

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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.

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o Integrity


1) Mitigate actual conflicts of interest.

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.

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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.

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o Credibility


1) Communicate information fairly and objectively.

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.

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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.

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o 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:

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.

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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.

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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.

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o 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.

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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.

o The FCPA prohibits payments to foreign officials, politicians, or political parties to obtain or renew business.

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o 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.

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

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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.

o 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.

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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.

o 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.

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o 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.

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.

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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.

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o 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.

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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.

o 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.

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o 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.

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o Once the right employees have been hired, training is the next priority. Training programs should be comprehensive, relate to real-world 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.

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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.

o An organizations culture is made up of the accumulated behavioral actions of all of its employees over time.

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o 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.

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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.

o 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.

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o 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.

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o 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.

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o 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.

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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.

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o Fraud and Fraud Risk Model

o Types of fraud

1) Fraudulent financial reporting, is most often committed by management to deceive financial statements users.

2) Misappropriation of assets, is most often committed by employees and results from theft or embezzlement.

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o The fraud risk model (Fraud Triangle)

o There are three characteristics of fraud:

1. Pressure (motivation).

2. Opportunity.

3. Rationalization. Rationalization

PressureOpportunity

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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).

o 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.

o 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.

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o 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.

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o 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.

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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.

o Corrective controls are used to correct errors. Examples of corrective controls are backup and recovery, and audit trails.

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o 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

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o Physical controls

o Safes, vaults, and safety deposit boxes for cash and business papers

o Alarms to prevent break-ins

o Television monitors to deter theft

o Computer facilities with pass key access

o 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.

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o 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.

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o 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.

2) An employee who is independent of the personnel responsible for the information should make the verification.

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o 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

2) Rotate employees duties and require employees to take vacations.

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Praise be to God

ethics - cma part 2

Documents

information confidential

comhdaibfahido examples

comhdaibfahido objectivity

comhdaibfahido conflict

o responsibility

documenting information

factual information

examples of responsibility