Management accountants are engaged in a struggle to gain acceptance as professionals within American Society. Management accountants have been largely insulated from liability concerns. One liability concern management accountants do potentially face is in connection with the required federal payroll withholding taxes. This study reviews that source of liability and tests its effect, along with economic factors, on management accountants' intent to follow their code of ethics. A within-subject experiment was conducted on members of local chapters of the Institute of Management Accountants. Each subject answered questions related to four scenarios depicting ethical conflicts. The scenarios differed on the combination of liability or no liability, and a favorable or unfavorable job market. The questions traced the course of action for resolution of an ethical conflict by the IMA Statement of Ethical Professional Practice. The results of this study indicate that the intention to follow the code is affected by both the liability aspect and the favorability of the job market. When liability is introduced, the code is more likely to be followed. When the job market becomes unfavorable the code is more likely to be followed in the early stages of resolution of the conflict, but less likely in the later stages and resignation from the organization becomes less likely. These results do not demonstrate the kind of ethical intentions which will gain the public's confidence. In addition, the results demonstrate the need for the ethics counseling services provided by the IMA to its members.
Management accountants are engaged in a struggle to gain acceptance as professionals within American Society. A significant step taken in that direction was the adoption of Statement No. 1C, Standards of Ethical Conduct, by the National Association of Accountants (NAA, 1983). The NAA has since changed its name to the Institute of Management Accountants and their ethical code is now called the Statement of Ethical Professional Practice. Recognition of a responsibility to the public and the potential for legal liability are facts of professional life. Management accountants in the USA, however, have been largely insulated from liability concerns. Their liability had primarily stemmed from association with their companies' state and federal tax returns until passage of the Sarbanes-Oxley Act of 2002 which requires the Chief Executive Officer and Chief Financial Officer of publicly traded firms to certify in writing that their financial statements fairly represent the results of operations.
Recognition of the ethical principles which govern conduct is a widely accepted distinguishing mark of a profession (Custis, 1933). The public accounting profession in America achieved the status of a profession during the 20th century. This status is largely the result of the formulation, adherence to, and updating of its own code of ethics (AICPA, 2010). The public and business community have noted these actions, and now regard Certified Public Accountants as professionals. Management accountants must continue to follow the same course of action.
A professional code of ethics is a voluntary assumption of self-discipline above and beyond the requirement of law (Carey and Doherty, 1966). In order to gain acceptance as a profession, management accountants must not only adopt a code of ethics, but must also demonstrate a willingness to adhere to a level of practice which calls for actions which are based on ethical principles rather than on potential liability. By behaving in a way consistent with their code of ethics, professionals earn the public's trust.
This study examines: (1) the requirements in the Statement of Ethical Professional Practice for resolution of an ethical conflict, (2) the legal liability of management accountants regarding their companies' federal tax returns, (3) the moral decision process, and (4) ethical bases used for making decisions. A survey instrument using four different scenarios was designed to test the effect of potential legal liability and a situational factor (the favorability of the job market) on the intent of management accountants to follow their code of ethics.
RESOLUTION OF AN ETHICAL CONFLICT
In the Statement of Ethical Professional Practice the procedures for the resolution of a significant ethical conflict are outlined in broad terms. The first step is to follow established policies of the organization toward the resolution of the conflict. Should these procedures not resolve the ethical conflict, the management accountant should consider the following courses of action (IMA, 2010):
Discuss with the immediate supervisor except when it appears the supervisor is involved. In that case, present the issue to the next level. If still unresolved, submit to the next management level. If the supervisor is the CEO or equivalent, the acceptable reviewing authority may be the audit committee, executive committee, board of directors, board of trustees or owners. Contact with higher levels should be initiated only with the supervisor's knowledge, assuming they are not involved. Communication outside the organization is not appropriate unless you believe there is a clear violation of law.
Clarify relevant ethical issues by initiating a confidential discussion with an IMA ethics counselor or impartial advisor to better understand possible courses of action.
Consult your own attorney as to the legal obligations and rights concerning the ethical conflict.
LEGAL LIABILITY OF MANAGEMENT ACCOUNTANTS
Management accountants generally are not subject to legal liability in association with their firm's financial statements and tax returns. A new source of legal liability arose under the Sarbanes-Oxley Act of 2002. Those management accountants who rise to the level of CEO or CFO within their firms face possible jail time for signing off on financial statements known to be false. This paper focuses, however, on the more traditional source of legal liability for management accountants - taxes. Management accountants who rise to the level of controller are subject to liability concerns regarding the payroll tax returns they are required to file and sign.
Statutory Tax Requirements
Employers have a duty under the withholding system established by Internal Revenue Code Section 3401 to collect both income and Federal Insurance Contribution Act (FICA) taxes from their employees. Sums collected for these employment taxes are commonly referred to as "trust funds" because Internal Revenue Code Section 7501(a) provides that they are deemed to be a "special fund held in trust for the United States."
Once net wages are paid to the employee, the taxes withheld are credited to the employee regardless of whether they are later actually paid by the employer. Employers who fail to pay taxes withheld from their employees' wages are liable, under Internal Revenue Code Section 3403, for the taxes which should have been paid. The officer or employee of a corporation who is responsible for the collection of employment taxes from the pay due an employee may be assessed a penalty equal to the amount of the taxes if he willfully fails to account for and pay over the amount due to the United States.
Internal Revenue Code Section 6672(a) provides in part that:
"Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat such tax or the payment thereof shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded or not collected, or not accounted for and paid over. . ."
Thus, a controller may be deemed to be the person responsible for the collection and payment of withholding taxes if he has authority to direct the payment of corporate funds. Furthermore, in order to be liable, his failure to comply with the statute must be willful.
The Hochstein Case
In Hochstein v. United States (1990), Hochstein was the controller of a manufacturing business. The issue was whether he was a responsible person under IRC section 6672 and would be held personally liable for tax payments that his former employer failed to make. He was not a shareholder, director or an officer of the company at any time. His responsibility as controller was to oversee the finances of the corporation, including the preparation of the payroll and the filing of the payroll tax returns. The company experienced severe financial problems and entered into a financing agreement to secure operating funds. Hochstein had no input into the decision to enter into the agreement nor did he negotiate it. Hochstein, however, was the one who dealt directly with the finance company in requesting the funds.
As the financial condition of the company deteriorated, the finance company refused to fund continuing operations. During the liquidation period the work force was greatly reduced and Hochstein could only secure enough money from the finance company to cover net wages. The withholding payments were not made from the fourth week in January, 198 1 until operations ceased in the second week of May, 1981.
Hochstein was held liable for the failure to make the withholding tax payments. He was deemed to be a "responsible person" because he did exercise significant control over the company's finances: he had check-signing authority, made initial determination of the order in which large bills were paid, and had the discretion to pay smaller bills. His actions were willful violations, because the court suggested that his duty in the situation was to prorate the available funds between the Government and the employees.
The Hanshaw Case
In Hanshaw v. United States (1988), the controller of a coal mining company was held liable for civil penalties under Internal Revenue Code section 6672. The issue was whether the IRS could meet its burden of proof that Hanshaw was in fact a "responsible person" under section 6672 even though Hanshaw was not an officer or director and whether Hanshaw could meet his burden of proof that he lacked "willfulness" necessary to be held liable under section 6672. The company failed to remit the withholding taxes when experiencing financial difficulties prior to its ultimate collapse. Other operating expenses and creditors were paid during this time. Hanshaw alone managed the financial side of the operations and prepared and signed the state and federal tax returns.
The Bankruptcy Court held that he was a "responsible person" because of his position in the corporate structure. Hanshaw argued that his superiors ordered him not to make the required withholding payments, and he was therefore not responsible. He also argued that his action was not willful because he would have been fired if he had disobeyed orders. The court rejected these arguments, ruling that the fact that he might have been fired does not make him any less responsible for the payment of the taxes.
THE MORAL JUDGMENT PROCESS
The Kohlberg Model
The most widely recognized researcher in the area of moral development is Lawrence Kohlberg, who identified six successive stages of moral development (Kohlberg, 1984). These six stages are categorizations of individual thinking in making moral judgments. The motivation behind the judgments varies from stage to stage. Kohlberg grouped his stages into three levels.
The first two stages are referred to as the preconventional level. The motives at this level are fear of punishment or of authorities and self-gratification. The next two stages are the conventional level. Motives here include approval from others and adherence to moral codes or codes of law. The final two stages are referred to the principled level. The motives here are a concern for others, a concern for broader social welfare, and finally a concern for moral principle. In the last stage individuals are aware of a variety of values and are motivated to do what is right simply for the sake of doing what is right.
The Rest Model
James Rest has also contributed significantly to research dealing with the moral decision process. Rest (1979) views the process as having four major components and refines Kohlberg' s stage concept. He focuses, rather, on the conditions under which a way of thinking is demonstrated and to what extent it is demonstrated.
The first component of the moral decision process is to determine how one's actions will affect the welfare of others in the situation. Second, one determines the moral ideal and formulates a moral course of action. Third, one selects among the alternatives - either to fulfill the moral ideal or to fulfill a competing value outcome. Fourth, one executes his intentions.
Ethical Bases for Decisions
Philosophy literature has identified two major foundations for ethical behavior. The first, Utilitarianism, is characterized by the belief that the value of an action is determined by the extent of its benefits (Smart and Williams, 1973). The second, Deontologism, is characterized by the belief that an action is ordained by moral obligation or duty (Kant, 198 1).
Utilitarianism may take one of two forms. Act-utilitarianism, the strongest form, occupies the position that an act may be judged right or wrong based on its consequences - whether good or bad. Rule-utilitarianism, the weaker form, holds that the action should be judged based on the goodness of the rule being followed. When confronted with a situation in which abiding by a code would work against the maximization of good consequences, the ruleutilitarian would modify the rule.
Deontologism, alternatively, holds that an action is right, independent of its consequences. The morally correct action in any situation is to do one's duty. This basis is rooted in religious directives, but also has considerable philosophical support. For example, William D. Ross (1930) identified seven intuitive duties which he suggested should be adhered to regardless of the resulting consequences one foresees.
PURPOSE OF THE STUDY
This study is designed to examine the compliance of members of the Institute of Management Accountants with their code of ethics. Specifically, the study attempts to determine the effect of two variables (legal liability consequences and the competitiveness of the job market) on a management accountant's decision to follow the procedures outlined by the Statement of Ethical Professional Practice for the resolution of an ethical conflict. The study also attempts to determine the ethical basis used by the participants in their decision process.
The following hypotheses are proposed and tested in this study:
H1: Legal liability will have no effect on a management accountant's compliance with the code.
H2: The favorability of the job market will have no effect on a management accountant 's compliance with the code.
H3: Management accountants with a deontological basis for their ethical decisions will be more likely to follow the code.
H4: Management accountants with a utilitarian basis for their ethical decisions will be more likely to deviate from the code.
Population and Sample
The population of interest is comprised of management accountants who are members of the IMA and are currently employed in industry. The sample consisted of IMA members in selected chapters from Texas, Arkansas, Mississippi, Louisiana, and Alabama. Three hundred research instruments were distributed to chapter members at chapter meetings and the instruments were returned via mail upon completion. Usable responses received totaled 126 for a 42 per cent response rate. The average age of the subjects was 48. Their ages ranged from 24 to 69. There were 82 males and 44 females participating in the study. Eighty-five subjects were Certified Management Accountants, 19 subjects were Certified Public Accountants and 16 subjects were Certified Internal Auditors.
The research instrument consisted of three separate sections. The first section was a reproduction of the procedures for the resolution of a significant ethical conflict taken from the Statement of Ethical Professional Practice. These procedures were followed by several questions designed to determine the subject's feelings toward codes of ethics. This section appeared first to remind the subjects of the ethical code they have adopted. The second section collected the demographic data.
The third section consisted of four scenarios depicting a different ethical conflict. Each was followed by a series of questions based on the procedures for the resolution of a significant ethical conflict from the Statement of Ethical Professional Practice. These questions were designed to trace how closely the subjects would follow the actions outlined by the code of conduct. The final question determined their feelings toward resignation from the organization. In each scenario the subject was asked by a superior to stop making tax withholding payments.
The scenarios differed on the combination of two factors - legal liability and the favorability of the job market. In the first scenario the subject was not liable and the job market was favorable. In the second scenario the subject was not liable and the job market was unfavorable. In the third scenario the subject was liable and the job market was favorable. In the fourth scenario the subject was liable and the job market was unfavorable.
Hypotheses 1 and 2 were tested by examining the responses to the questions following the four scenarios. Data was analyzed by conducting a series of matched-pair t-tests on the appropriate combinations of scenarios. The results of these i-tests are summarized in Table 1 and Table 2 below.
Hypothesis 1, that legal liability will have no effect on the decision to follow the code, was rejected after examining the results of the ¿-tests on scenarios 1 and 3 (favorable job market) and examining the results of the ¿-tests on scenarios 2 and 4 (unfavorable job market). Table 1 summarizes the results of these tests. In the favorable job market, there was a significant shift by the subjects toward consulting with an attorney and toward resignation from the organization when legal liability was introduced. In the unfavorable job market significant differences were also found when legal liability was introduced. The subjects were more likely to seek out a confidential advisor and were more likely to resign from the organization. In summary, legal liability tended to shift behavior toward behavior identified as appropriate by the code of ethics.
Hypothesis 2, that the favorability of the job market will have no effect on the decision to follow the code, was also rejected after examining the results of the i-tests on scenarios 1 and 2 (no liability involved) and examining the results of the i-tests on scenarios 3 and 4 (liability involved). Table 2 summarizes the results of these tests. In the scenarios with no liability, there were significant differences after the job market became unfavorable. Subjects were less likely to seek out a confidential advisor, which is contrary to the recommendation of the code. Subjects were also less likely to consider resigning from the organization when the job market became unfavorable. In the scenarios with liability as a factor, there were also significant differences after the job market became unfavorable. Subjects were less likely to consult with an attorney and less likely to resign from the organization.
Hypotheses 3 and 4 were tested by using the response to the statement "Situational factors affect whether a code of ethics should be followed" as a surrogate measure for the ethical basis used for decision making. Respondents who agreed with the statement were classified as utilitarian and those who did not agree were classified as deontological. A series of ANOVA' s were run using the responses to the questions following the four scenarios as dependent variables and the utilitarian versus deontological classification as the independent variable. Because the ANOVA' s revealed no significant differences between the two groups, hypotheses 3 and 4 were not supported.
SUMMARY AND CONCLUSIONS
In order for management accountants to be accepted as professionals in our society the public must perceive them as having an ethical standard which is self-imposed and goes beyond compliance with the law. Their code of ethics, therefore, should be followed in the resolution of ethical conflicts regardless of the legal liability involved. In practice, management accountants may be held liable as persons responsible for the collection and payment of withholding taxes as well as being held liable for the fairness of the presentation within the financial statements. The proper handling of these aspects of their jobs is therefore an opportunity to gain public confidence.
The results of this study indicate that the intention to follow the code is affected by both the liability aspect and the favorability of the job market. When liability is introduced, the code is more likely to be followed. When the job market becomes unfavorable the code is more likely to be followed in the early stages of resolution of the conflict, but less likely in the later stages and resignation from the organization becomes less likely.
These results do not demonstrate the kind of ethical intentions which will gain the public's confidence. They do suggest that continued and improved coverage of ethical considerations in the business and accounting curriculum is necessary. In addition, the results demonstrate the need for the ethics counseling services provided by the IMA to its members. Those who provide these services may need to focus their efforts toward attaining greater compliance with the code of ethics regardless of whether personal legal liability is present or whether economic conditions are favorable or unfavorable. This support system may go a long way in promoting Waters' (1990) suggestion that ethics and excellence for management accountants go hand in hand.
American Institute of Certified Public Accountants, Code of Professional Conduct, New York, N.Y.,
Carey, John L. and William Doherty. Ethical Standards of the Accounting Profession. New York: American Institute of Certified Public Accountants, 1966.
Custis, V.. "Accountancy as a Profession." Ethics of Accountancy. New York: The Roland Press Company, 1933.
Hanshawv. United States. 94 BR 753 (Bankr. M.D. Fla. 1988).
Hochstein v. United States. 900 F.2d 543 (2nd Cir. 1990).
Institute of Management Accountants, Statement of Ethical Professional Practice, Montvale, NJ, 2010.
Internal Revenue Code Sec. 6672.
Kant, I. Grounding for the Metaphysics of Morals. Trans. J. W. Ellington. Indianapolis: Hackett Publishing., 1981.
Kohlberg, Lawrence. The Psychology of Moral Development. New York: Harper and Row, 1984.
National Association of Accountants, Statements on Management Accounting: Standards of Ethical Conduct for Management Accountants, Statement No. 1C, New York, N.Y., June 1, 1983.
Rest, James R. Development in Judging Moral Issues. Minneapolis: University of Minnesota Press, 1979.
Ross, William D. The Right and the Good. Oxford, England: The Clarendon Press, 1930.
Smart, John Jamieson Carswell and Bernard Williams. Utilitarianism For and Against. London, England: Cambridge University Press, 1973.
Waters, Ralph E. "Ethics and Excellence." Management Accounting. 71:12-13, January, 1990.
Timothy L. McCoy, Lamar University…