CHAPTER 8 :

The Ethics of Managerial Accounting

The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management, which is the Institute of Management Accountants code of ethics, defines the
scope of obligations : 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. Let s address the code provisions more
specifically. The code presents four standards of ethical conduct, 5 which we can summarize as
follows :

Competence
The management accountant must maintain an appropriate level of knowledge and skill;
follow the laws, rules and technical standards; and prepare reports.
Confidentially
The management accountant must refrain from disclosure of confidential information
except when authorized and legally obligated to do so.
Integrity
This standard requires the management accountant to avoid both actual and apparent
conflicts of interest and to refrain from activities that would prejudice the accountants
ability to execute ethical duties.
Objectivity
The central standard of the code is objectivity, which requires the management
accountant to communicate information fairly and objectively and to disclose fully all
relevant information that could reasonably be expected to influence an intended users
understanding of the reports, comments, and recommendations presented.

Reasons Used to Justify Unethical Behaviors

A remarkable article by Saul W. Gellerman gives four rationalizations that managers use to
justify suspect behavior. Management accountants can use these rationalizations as guides to
warn against misrepresenting financial statements.
My behavior is not actually illegal or immoral
The first reason (rationalization?) given for unethical behavior is a belief that the activity
is within reasonable ethical and legal limits that is, that it is not really illegal or
immoral.
The actions are in the companys best interests
A second reason to justify unethical behavior, according to Gellerman, is a belief that the
activity is in the individual s or the corporations best interests that the individual would
somehow be expected to undertake the activity.

No one will ever find out

A third reason to justify unethical activity, Gellerman says, is the belief that the activity is
safe because it will never be found out or publicized; the classic crime and punishment
issue of discovery.
The company will protect me
A final reason, according to Gellerman, for bad ethical choices is a belief that because the
activity helps the company, the company will condone it and even protect the person who
engages in it.

Blowing the Whistle

Whistle - blowing is viewed as an act of disloyalty, and there is a presumption against it. If the
analogy holds, what is unacceptable in sports is also unacceptable in business whistle - blowing
is considered wrong. Whistle - blowing is an obligation when it is based on the following
conditions :

the proper motivation

Whistle - blowing should be done from the appropriate moral motive not from a desire
to get ahead, for example, or out of spite.
the proper evidence
The whistle - blower must be sure that his or her belief that inappropriate actions have
occurred is based on evidence that would persuade a reasonable person.
the proper analysis
The whistle - blower should act only after a careful analysis of the harm that can result
from the inappropriate action.
the proper channels
Except in special circumstances, the whistle - blower should exhaust all internal channels
before informing the public. The whistle blowers action should be commensurate with
his or her responsibility to avoid or expose moral violations.

CHAPTER 9 :
The Ethics of Tax Accounting
This chapter will deal with the Statements on Standards for Tax Services (SSTS) in detail. The
other standards are mentioned because the tax accountant must be aware and must comply with
all standards. Since the published standards are revised and updated on a regular basis, it is the

tax accountants responsibility to remain current with these standards. The tax accountant has
several responsibilities to the public, through the government:
1. The tax accountant has an obligation not to lie or be party to a lie on a tax return.
2. The signature on a tax return is a declaration under penalties of perjury that to the best of
the preparers knowledge, the return and accompanying schedules and statements are
true, correct, and complete.
There are seven standards presented in the Statements on Standards for Tax Services. As found in
the explanation sections, the following summarize the central themes of each standard:
1) A member should not recommend a tax return position unless it has a realistic possibility
of being sustained on its merits.
2) A member should make a reasonable effort to obtain from the taxpayer the information
necessary to answer all questions on tax returns.
3) A member may rely on information furnished by the taxpayer or third parties without
verification.
4) Unless prohibited by statute or by rule, a member may use the taxpayers estimates in the
preparation of a tax return if it is not practical to obtain exact data and the member
determines that the estimates are reasonable based on the facts and circumstances known
to the member.
5) A member may recommend a tax return position or prepare or sign a return that departs
from the treatment of an item as concluded in an administrative proceeding or court
decision with respect to a prior return of a taxpayer. However, the member should
consider whether the standards in SSTS No. 1 are met.
6) A member should inform the taxpayer promptly upon becoming aware of an error in a
previously filed return or upon becoming aware of a taxpayers failure to file a required
return. A member should recommend corrective measures to be taken.
7) A member should use professional judgment to ensure that tax advice provided to a
taxpayer reflects competency and appropriately serves the taxpayers needs.
Standard Statement No. 1. Tax Return Positions
Statement 1, 5.a. States that A member should not recommend a tax return position or prepare
or sign a tax return taking a position unless the member has a good - faith belief that the position
has at least a realistic possibility of being sustained administratively or judicially on its merits if
challenged.
Standard Statement No. 2. Answers to Questions on Returns
This statement is non-problematic and prescribes the following: A member should make a
reasonable effort to obtain from the taxpayer the information necessary to provide appropriate
answers to all questions on a tax return before signing as preparer.

Standard Statement No. 3. Certain Procedural a Spects of Preparing Returns

A preparer can rely on the good faith of the client to provide accurate information in preparing a
tax return, but should not ignore the implications of information furnished and should make
reasonable inquiries if the information appears to be incorrect, incomplete or inconsistent.
Standard Statement No.4. Use of Estimates
This is another non-problematic standard. A preparer may use the taxpayers estimates if it is not
practical to obtain the exact data and if the preparer determines the estimates are reasonable,
based on the preparer s knowledge.
Statement No.5. Departure from a Previous Position
Here again is a rather technical standard. As provided in SSTS no. 1, Tax Return Positions, a
member may recommend a tax return position or prepare or sign a tax return that departs from
the treatment of an item as concluded in an administrative proceeding or court decision with
respect to a prior return of the taxpayer.
Standard Statement No. 6. Knowledge of Error
The member should inform the taxpayer promptly and recommend the corrective measures to be
taken. If in preparing the current years return the preparer discovers that the taxpayer has not
taken appropriate action to correct an error from a prior year, the preparer needs to decide
whether to continue the relationship with the taxpayer.
Standard Statement No. 7. Form and Content of Advice to Taxpayers
This is a new statement added in 2009 which requires a member to use professional judgment to
insure that tax advice reflects competence and appropriately serves the taxpayers needs.