Academic journal article Journal of Legal, Ethical and Regulatory Issues

An Investigation of Management Accountants' Experience with Ethical Dilemmas Involving Financial Reporting and Employee Supervision

Academic journal article Journal of Legal, Ethical and Regulatory Issues

An Investigation of Management Accountants' Experience with Ethical Dilemmas Involving Financial Reporting and Employee Supervision

Article excerpt


As the decision making role of management accountants continues to expand, so does the likelihood that many of these decisions will involve ethical dimensions. This paper reports upon an investigation of ethical dilemmas encountered by management accountants. The investigation was limited to the areas of financial reporting and employee supervision because of their importance to practicing management accountants.

The National Association of Accountants (now known as the Institute of Management Accountants) commissioned a study in 1979 to determine what posture, if any, the organization should take regarding ethics for management accountants. Data were collected from management accountants using interviews and mail questionnaires. Phase one of the study was designed to determine the types of ethical dilemmas encountered by management accountants in their work and the frequency with which these dilemmas occur. The IMA needed this information in deciding what action it should take, if any, concerning a code of ethics for management accountants. Among the most common ethical dilemmas faced by management accountants were ones involving pressure from management to manipulate profit and income taxes (Mertz and Grobner, 1982). This study provided groundwork for the organization's first code of conduct "Standards of Ethical Conduct for Management Accountants" (NAA, 1983). Their ethical code is now called the "Statement of Ethical Professional Practice" (IMA, 2010).

In a study involving 2,000 members of the IMA, Mihalek, Rich, and Smith (1987) found that 52 percent of the respondents in lower level positions (accountants, analysts, etc.), 47 percent in middle level positions (divisional controllers, managers, directors, etc.), and 32 percent in upper level positions (chief financial officers, controllers, corporate vice presidents, etc.) had been pressured by management to alter financial results. Over 50 percent of the respondents with publicly-held organizations felt pressure to alter net income and return on investment figures, compared with only one third of those with privately- held organizations. Respondents reported differing levels of pressure to alter financial results based on whether they worked on a divisional or corporate level. Only 39 percent of the management accountants in corporate positions reported pressure to materially alter financial results, while 50 percent of those in divisional positions reported such pressure. The study revealed that respondents with professional certifications were less likely to yield to pressure to alter financial statements. Respondents indicated that in resolving an ethical dilemma they would first seek help from their chief financial officer; second, they would seek help from a friend. In contrast, the IMA Code of Ethics suggests that in resolving and ethical dilemma members should follow the chain of command in their organization (Mihalek, Rich, and Smith, 1987).

Merz and Grobner (1982) and Mihalek, Rich, and Smith (1987) revealed that financial reporting ethical dilemmas are quite common. In addition concurrent congressional investigation supported their findings in the "Treadway Commission on Fraudulent Financial Reporting". The Treadway commission report revealed that management accountants had indeed participated in the preparation of their company's fraudulent financial reports (Schultis and Williams, 1985).

Supervision is another area in which management accountants are often faced with ethical dilemmas. Toffler (1986) studied ethical dilemmas of 33 managers, ranging in position from first-line supervisors to chief executive officers. The study revealed that over 66 percent of the ethical situations described by the managers involved managing human resource processes and personnel. Further complicating the supervision issue for managers are the revelations of research that shows significant differences exist between individual employees regarding their values and philosophies which leads to differences in how they approach ethical issues (Fraedrich and Ferrell, 1992). …

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