REVIEWER 2. Changing methods or estimate (e.g.

FIFO to
LIFO, depreciation method, bad debts)
MODULE 1
a. Full disclosure = ethical
Pressures of Public-listed firms: b. Little or no disclosure = not ethical
1. Meet or beat targets (analysts) EM Techniques
o If not met, downgraded = stock price will fall
1. Cookie Jar Reserves
2. Comply with debt covenants
o If not met, interest rates on their debts will
increase
3. Growth : Market would reward growth

Materiality (for large companies e.g. 5%)

2. Big Bath Charges

Earnings Management (EM) (not always fraud; not always

illegal)
1. Timing transactions (strategic matching) : to
produce a gain or loss with the primary purpose of
manipulating the earnings number EM is not fraud, unless:
 1. Fictitious transactions
o Inventing sales (revenue recognition)
o Hiding expenses
2. Non-GAAP accounting
o Failure to consolidate affiliated entities (Enron)
o Misclassification
o Capitalizing cost instead of expensing
o Creative Acquisition Accounting (e.g. 50%+ =
Assets and Liabilities at market value)
Sarbanes-Oxley Act of 2002
o New rules for publicly traded companies
o New rules for audit firms
o Creation of PCAOB
Rules for companies
1. CEO and CFO must certify the FS
i. Enhanced criminal penalties (particularly if they
destroy documents)
2. The company must assess the effectiveness of its
internal controls (and issue a report)
Rules for audit firms
1. Must implement quality control if they have a publicly-
traded client
2. A second partner must review and approve audit reports
(apart of the lead partner)
3. Lead partner and reviewing partner must rotate out
every 5 years
4. Must audit the client’s internal controls (and issue a
report) – Section 404
a. Major complaint: very costly especially for the
small businesses (audit work + internal controls)
5. Prohibited from providing many non-audit services
(e.g. MAS, tax) to audit clients
Creation of PCAOB (Public Company Accounting
Oversight Board)
o Before PCAOB, audit firms are self-regulated
o Non-profit organization created by US Congress in
2002
o Regulates the auditing industry (watchdog)
Structure of the PCAOB
o 5 Board members appointed by SEC to 5-year term
o SEC oversees the PCAOB (approve budget, monitor the
activities)
o Funded by fees paid by public companies
Roles of PCAOB
1. Registration
2. Monitoring (sample some of the audit reports = quality
control = within standards?)
3. Standard setting (not GAAP, but auditing standards)
 4. Enforcement (including sanction)
ABOUT IMA AND ITS ETHICAL PROFESSIONAL
PRACTICE
IMA – Institute of Management Accountants
- Association of accountants and financial professionals
in business
- One of the largest asocciations
- Supports profession through research, CMA (cutie pls
Lord Amen) education, networking and advocacy.
- Highest ethical business practices
- Committed to advocating highest standards of ethical
business practices
- First written code of ethics: Standards of Ethical
Conduct of Management Accountants
- IMA Statement of Ethical Professional Practice
IMA Statement of Ethical Professional Practice
- Members should behave ethically
Principles
- Honesty
- Fairness
- Objectivity
- Responsibility
Standards
1. Competence
- Appropriate level of professional leadership and
expertise by enhancing knowledge and skills
- Perform duties according to relevant laws, regulations,
and technical standards
- Provide decision support info and recommendation that
are accurate, clear, and concise and timely.
2. Confidentiality
- Keep confidential except when disclosure is required
- Inform appropriate use of confidential info
- Monitor compliance
- Refrain using confidential info for illegal advantage
3. Integrity
- Mitigate actual conflicts of interst
- Refrain engaging in any conduct that would prejudice
carrying out duties ethically
- Abstain from engaging in activities that would discredit
the profession
- Contribute positive ethical culture
4. Credibility
- Communicate info fair and objectively
- Provide all relevant info
- Report delays or deficiencies
 - Communicate professional limitations a. Jail time if falsified
b. Additional incentives for CEO and CFO to
ensure FS is not misrepresented
Resolving Ethical Issues 2. Public Company Accounting Oversight Board
a. Provides additional oversight over the audit
- Discuss with member’s immediate supervisor. If profession
involve too, present to next level management b. Conduct investigations
- IMA’s anonymous helpline 3. Places power to hire, compensate, and terminate the
- Consult lawyer to learn of any legal obligations public accounting firm
- If not successful, disassociating from the organization. a. Audit committee must be independent. No
affiliations with the company
4. Restrictions on audit firms
MODULE 2 a. Accounting firms are prohibited to provide a
Corporate governance wide variety of non-auditing services to an audit
client
- System by which a company is directed and controlled 5. Company is required to have an internal control report
- Provides incentives for the board of directors and top in their annual report
management for effective monitoring of performance. a. Financials disclosures for investors
b. Opinion of audit firm if management’s internal
-REFERENCES tab-
control is effective
6. Severe penalites
a. 20 years in prison for altering or destroying
Sarbanes-Oxley Act of 2002
documents
- intended to protect the interests of those who invest in b. 10 years in prison who retaliate against witness
publicly traded companies by improving the reliability
and accuracy of corporate financial reports and
disclosures.  MODULE 3
Sustainability
1. Requires both CEO and CFO certify in writing that
company FS and disclosures fairly represent the results - Important in the contemporary business environment
of operations
 - Involves broader perspectives than shareholder and
customer value
- Greater awareness led to sustainability reports and
performance
Corporate sustainability
- Consider interrelated impacts of activities on the
economy
- Sustainability is strategic priority
Sustainability reports
- Measure and communicate the economic, environment
and social impact
- Global Reporting Initiative (GRI) Framework
- International Integrated Reporting Framework
o Captures of org activities add or decrease value
across six capitals
One reason for the growing adoption of external sustainability
practices and sustainability reporting is the changing demands
of stakeholders such as customers, employees, investors,
banks, suppliers, community groups, non-government
organisations
(NGOs), the media, governments and regulators.
Environmental and social impacts can be difficult to recognize
because future ecological and social issues are not yet known,
many costs and benefits occur outside the organisation, and
many costs and benefits are difficult to measure in financial
terms.
Sustainable investments focus on achieving a sustainable
economy, a sustainable environment and sustainable society
Corporate social responsibility (CSR) involves organisations
taking into account the social and environmental impact of
corporate activity when making decisions
– May increase profitability
– Determines long-term survival
– Demanded by stakeholders: customers,
employees, investors
Environmental Management Accounting (EMA)
• Consists of environmentally-related management
accounting systems and practices
• Life cycle costing, environmental cost accounting,
environmental performance measures, assessment of
environmental benefits, strategic planning for
environmental management
• EMA techniques
– Financially-oriented EMA
• Environmental costs
 • Costs incurred to prevent,
monitor and report
environmental impacts and the
cost of failing to comply with
environmental regulations
• Cost of waste management
systems, environmental training,
legal activities and fines, record
keeping and reporting, cost of
remediation of environmental
impacts
• Environmental product costing
• Involves tracing direct and
indirect environmental costs to
products
• The cost of waste management,
permits and fees, recycling
• Environmental performance indicators
• Used to set targets, and monitor
environmental performance
• Environmentally-induced capital
expenditure
Environmental Management Systems (EMS) and EMA
• Driven by the desire to improve
the organisation's environmental
impact, or to comply with
environmental regulations
•
• Environmentally-induced revenues
• Arise from positive
environmental actions
• Increased revenue from the sale
of recycled materials, from
higher selling prices for greener
products, increased customer
satisfaction, improved employee
morale
– Physically-oriented EMA
• Techniques that focus on supplying
information to management that
accounts for the organisation’s impact
on the natural environment
• Kilograms of noxious waste
emissions, kilowatt hours of
electricity used, decibels of noise
• Used for tactical decisions and
capital expenditure decisions
• EMS—systems that organisations put in place to
manage their environmental performance
 – May include recycling systems, systems to
monitor and control levels of liquids, material
and atmospheric discharge and waste
• ISO 14001 is an international standard for EMA and its
audit
• EMS and adoption of ISO 14001 requires that
environmental performance be measured against
policies, objectives and targets
Economic, environmental and social impacts
• Economic and social impacts are difficult to
identify and measure, but may be substantial
• Future ecological and social impacts are not yet known Environment Costs

– Current work practices may have future
environmental and social consequences which
we cannot predict
• Many costs and benefits are external to the organisation
– Difficult to detect and assess
• Environmental costs can be analysed using the same
framework as used to analyse quality costs
• Prevention activities
– Solve environmental problems before they
occur, or turn problems into opportunities

• Many costs and benefits are difficult to measure in – Costs of these activities are ‘investments’, as
financial terms they reduce the future outlays and provide long-
term benefits
• Appraisal activities
– Monitor the levels of environmental impact
– Measures damage, inspects processes and
products, audits supplier performance
• Internal failure activities
– To correct breakdowns discovered in appraisal
activities
– Cost of cleaning the plant after spillage, cost of
occupational health and safety claims by
employees

• External failure activities

– Occur when resolution and remediation efforts
fall outside of the organisation’s management
– Cost of cleaning up polluted sites, fines for
environmental damage, lost profits associated
with damage to reputation

Improving supply chain management through measuring

environmental and social impacts
• Suppliers
– An organisation may be willing to pay more
where suppliers have reduced environmental
and social impacts
 – Organisations may work with suppliers to adopt
more responsible environmental and societal
practices; this can lead to cost reductions
– Formal supplier evaluation can include
assessment of a range of environmental and
social factors, as well as financial factors
• Customers
– An organisation can work with customers to
reduce the adverse environmental and social
impact of products
• Recycling and disposal programs
• Substitution of materials
• Cost savings
– Sometimes customers may be willing to pay
more for a more environmentally-friendly
product
– Marketing and strategic considerations need to
be considered in such pricing decisions
Sustainability and performance measurement
• Sustainability reporting–formal reporting of
information about corporate sustainability that
describes the economic, environmental and social
impact of the organisation’s activities
– May also be called triple bottom line reporting,
social reports, social audits, environmental
reports
• Inside-out approach–measures developed within the
business and then fed through to sustainability reports
• Outside-in approach–reported measures of
sustainability performance driven by external
regulations or guidelines
• Global Reporting Initiative (GRI) Guidelines are
regarded as the global standard for sustainability
reporting
– 48 sets of core indicators + 31 additional
indicators
– Includes unique indicators for certain industries
• Dow Jones sustainability index (DJSI) compares the
sustainability performance of the world’s largest
companies
• Australian SAM Sustainability Index (AuSSI) assess
the sustainability performance of Australian companies
• ISO 14031 environmental performance indicators
– Operational performance indicators include
measures of waste levels and energy
consumption relative to sales or some other
activity
 – Management performance indicators measure
the efforts of management to improve the
environmental performance of their organisation
– Environmental condition indicators measure the
actual condition of the environment at a local,
national or global level
– May be reported as absolute measures or as a Environmental outcomes: capital expenditure analysis
percentage relative to a baseline • Inclusion of environmental costs and benefits may
• Adding sustainability to the balanced scorecard make financially non-viable projects more attractive or
financially viable projects less attractive
– Sustainability measures may be included within
the four perspectives • Weighting given to environmental factors depends on
the organisation's values and preferences
– An environmental or social perspective may be
added to the BSC • Some capital expenditure analysis may be driven by the
need to be environmentally responsible
– A separate sustainable scorecard may be
developed
• Strategy maps may be developed to identify cause and
effect relationships between objectives, strategies and
to guide the selection of performance measures
Climate change and management accounting
• Climate change is the increase in temperature and
changes in other climate characteristics which has been
observed since the mid-1980s
• A result of the build up of gases (particularly carbon
dioxide) which are trapped in the Earth’s atmosphere
(the “greenhouse effect”)
• Actions to reduce greenhouse gas emissions are called
“mitigation”, and actions to respond to climate change
are called “adaptation”
• An emissions trading scheme (ETS) mitigates climate
change and reduces the cost of emissions control
• Implications for business
• Many managers are yet to respond to climate
change through adopting sustainability
approaches
• The ETS will increase awareness
• Organisations that respond to climate change
may not adopt broader sustainability agenda
• Implications for management accounting
• The five tier cost framework of the US EPA,
may provide a useful way to identify, classify
and measure costs associated with climate
change
• Organisations that participate in the ETS and wish to
promote themselves as carbon neutral need to measure
their greenhouse gas emissions
– They will also need to understand their “carbon
footprint”, the quantity of greenhouse gas
emissions they produce
• International protocol (WRI/WBCSD) outlines three
levels of measurement
– Scope 1 – direct emissions controlled by the
business
– Scope 2 – indirect emissions from purchased
electricity consumed by the business
– Scope 3 – other indirect emissions caused by
business activities, from sources outside of the
business
• Management accountants can play a role by
– Collecting and analysing non-financial
information
– Gathering information from across the value
chain
– Managing information systems and large data
bases
• For example
– Estimate the cost of emissions produced by
products, department and customers
 – Identify carbon non-value-added activities • Management accountants are well equipped to produce
a range of information that will help businesses respond
– Understand carbon drivers
to climate change
– Supplier evaluation may include supplier
emissions
– Quantity of emissions produced and causes of
emissions may be measured
SUMMARY
• Sustainability involves considering the economic,
environmental and social impacts of an organisation's
activities
• Environmental management accounting (EMA) consists
of environmental-related management accounting
systems and practices
• Environmental and social impacts can be difficult to
recognise and to measure
• Environmental costs can be classified and managed
using a five-tier framework
• Environmental and social costs can be input into
management decision making, including capital
expenditure analysis
• Performance measurement systems, including SPMS,
can be adapted to include environmental and social
measures
• External frameworks include ISO 14000 series
and the GRI guidelines