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When Cost Can Kill Ethical Challenges Facing Cost Accountants

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Ethical Challenges Facing Cost Accountants Why do cost accountants need ethics? What are the consequences of unethical cost accounting behavior? – PowerPoint PPT presentation

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Title: When Cost Can Kill Ethical Challenges Facing Cost Accountants


1
When Cost Can KillEthical Challenges Facing Cost
Accountants
2
  • Why do cost accountants need ethics?
  • What are the consequences of unethical cost
    accounting behavior?

3
Constant Dilemma Cost control vs. Ethical
behavior
  • Wall Street and investor demand for profit
    tight cost control
  • Postpone maintenance
  • Reduce workforce and employee training
  • Expedite new product introduction without
    sufficient testing
  • Use litigation to avoid environmental cleanup

4
Constant Dilemma Cost control vs. Ethical
behavior
  • Can cost cutting go too far?
  • Illegal practice
  • Human rights violation
  • Environmental violation

5
When cost can kill!
  • British Petroleum 2005 Texas City oil refinery
    explosion, 15 dead, 80 injured
  • Contributor High-level decision to defer
    overhaul, cut staff and rein in cost
  • General Electric
  • Over 1.3 million pounds of PCB's were dropped in
    the Hudson river by GE.
  • Exxon Mobil Oil spill in Brooklyn

6
Overview
  • I. Standards of Ethical Conduct
  • II. Cost Accounting Ethical Dilemmas
  • III. Procedures to Resolve an Ethical Dilemma
  • IV. Measures to Prevent Unethical Conduct

7
I. Ethics Management Accountants
  • Ethics Branch of philosophy concerned with the
    nature of ultimate value and the standards by
    which human actions can be judged right or wrong.
    Britannica Concise Encyclopedia
  • IMA principles

Honesty Fairness Objectivity Responsibility
8
I. Ethics Management Accountants
  • Standards of Ethical Conduct for Management
    Accountants by Institute of Management
    Accountants (IMA)

Competence Confidentiality Integrity Credibility
9
CompetenceMembers have a responsibility to
  • Maintain an appropriate level of professional
    expertise by continually developing knowledge and
    skills
  • Perform their professional duties in accordance
    with relevant laws, regulations, and technical
    standards

10
Competence (continued)Members have a
responsibility to
  • Provide decision support information and
    recommendations that are accurate, clear,
    concise, and timely
  • Recognize and communicate professional
    limitations or other constraints that would
    preclude responsible judgment or successful
    performance of an activity

11
Confidentiality Members have a responsibility to
  • Keep information confidential except when
    disclosure is authorized or legally required.
  • Inform all relevant parties regarding appropriate
    use of confidential information. Monitor
    subordinates activities to ensure compliance.
  • Refrain from using confidential information for
    unethical or illegal advantage

12
Integrity Members have a responsibility to
  • Mitigate actual conflicts of interest, regularly
    communicate with business associates to avoid
    apparent conflicts of interest. Advise all
    appropriate parties of any potential conflict.
  • Refrain from engaging in any conduct that would
    prejudice carrying out duties ethically
  • Abstain from engaging in or supporting any
    activity that might discredit the profession.

13
Credibility Members have a responsibility to
  • Communicate information fairly and objectively
  • Disclose all relevant information that could
    reasonably be expected to influence an intended
    users understanding of the reports, analyses, or
    recommendations
  • Disclose delays or deficiencies in information,
    timeliness, processing, or internal controls in
    conformance with organization policy and/or
    applicable law.

14
II. Cost Accounting Ethical Dilemmas
  • The role of Cost Accountants in corporate
    decision-making
  • Planning and budgeting
  • Project cost-benefit analyses
  • Performance report after implementation

15
Dilemmas Examples
  • A. Cost control
  • A1. Labor cost
  • A2. Regular maintenance and repair cost
  • A3. Environmental cleanup cost
  • B. Cost estimates
  • C. Cost reporting
  • D. Performance measure

16
A1. Labor cost
  • Measures to reduce labor cost
  • Outsource to overseas
  • Reduce healthcare coverage
  • Cut workforce and employee training
  • Use illegal immigrants and below minimum wage pay

17
A1. Labor cost
  • Wal-Mart 2003 245 illegal immigrants arrested
    they were hired to clean the stores by cleaning
    companies contracting with Wal-Mart.
  • General Motors 2007 plans to eliminate 30k of
    its 113k US hourly factory positions while
    expanding in India and China

18
A1. Labor cost
  • Any good example of labor control?
  • Mittal Steel
  • Promise of no layoff
  • Profit-sharing
  • Our people is our culture

19
A2. Maintenance cost
  • Cut or delay regular maintenance and repair costs
    for immediate boost in bottom line
  • Myopic behavior with higher future remedy cost
  • Unsustainable cost cutting that adds noise in
    earnings signal

20
A3 Environmental cost
  • Prevention
  • Evaluate and select suppliers and pollution
    control equipment
  • Design process and products
  • Evaluate environmental risk
  • Recycling
  • Detection
  • Environmental auditing and inspection
  • Testing and measurement for contamination

21
A3 Environmental cost
  • Internal failure
  • Pollution control and toxic waste management
  • Licensing facilities for pollution
  • External failure
  • Cleaning up polluted water and soil
  • Cleaning up oil spill
  • Settling personal injury claims
  • Damaging ecosystem
  • Loose sales due to reputation

22
A3 Environmental costs
  • Environmental cost report and product costing
  • Companies that saved millions by reducing or
    eliminating environmental impact
  • GM
  • Commonwealth Edison
  • Andersen Corp.
  • Xerox Europe

23
B. Cost estimates
  • Under-estimate RD costs
  • Under-estimate break-even points for new products
  • Under-estimate time to test and launch new
    products
  • Over-estimate chance of FDA or other regulatory
    approval

24
Cost estimates
  • Airbus Jumbo airplane A380, maiden flight 4/27/05
  • 2000, estimated BE point 250
  • 2005, estimated BE point 270
  • 2006, estimated BE point 420
  • Whats the difference between legitimate
    estimation error and false reporting?

25
Cost estimates
  • Factors contribute to estimation errors
  • Unforeseen circumstance in design, testing, labor
    market, legal environment, supply, economy,
    corporate politics and bureaucracy
  • As the company learns and revise its estimates
    DISCLOSE immediately

26
C. Cost reporting
  • Falsely report capital investment progress
  • Falsely report cost of new product RD or
    clinical trial
  • Over-report cost for cost-plus pricing

27
D. Performance measure
  • For each of the following common performance
    measures, construct a scenario to game the
    system.
  • Sales
  • Net income
  • Residual income
  • Return on investment (ROI)
  • Economic-value-added (EVA)
  • Balanced score-card

28
III. Before You Blow the Whistle
  • Steps you can take before resignation
  • What can you expect for whistle blowing?
  • Laws that protect whistleblower.

29
Steps you should consider
  • Report it to higher management
  • If the higher (or highest) management personnel
    are involved in the unethical behavior, talk to
    the Chief Ethics Officer, ethics or audit
    committee
  • Consult a lawyer
  • Resign
  • Blow the Whistle

30
Outside Sources
  • IMA ethics helpline 1-800-245-1383
  • AICPA ethics decision tree
  • If you must below the whistle, make sure you have
    the proper evidence to support your claim.

31
What can you expect for whistle blowing?
  • Get fired
  • Lose your house and savings
  • Smeared reputation
  • Unable to find another job
  • Long and tiresome lawsuit

32
Legislation on ethics
  • Securities and Exchange Act 1933 and 1934
  • Foreign Corrupt Practices Act of 1977
  • FIDCA Improvement Act of 1991
  • Private Securities Litigation Reform Act of 1995
  • Federal False Claims Act
  • Sarbanes-Oxley Act of 2002

33
Laws that protect whistleblower.
  • Federal False Claims Act
  • 15 - 25 of settlement proceeds
  • Sarbanes-Oxley Act of 2002
  • TITLE VIII--CORPORATE AND CRIMINAL FRAUD
    ACCOUNTABILITYSec. 801. Short title.Sec. 802.
    Criminal penalties for altering documents.Sec.
    803. Debts nondischargeable if incurred in
    violation of securities fraud laws.Sec. 804.
    Statute of limitations for securities fraud.Sec.
    805. Review of Federal Sentencing Guidelines for
    obstruction of justice and extensive criminal
    fraud.
  • Sec. 806. Protection for employees of
    publicly traded companies who provide evidence of
    fraud.Sec. 807. Criminal penalties for
    defrauding shareholders of publicly traded
    companies.

34
SOX - continued
  • TITLE IX--WHITE-COLLAR CRIME PENALTY
    ENHANCEMENTSSec. 901. Short title.Sec. 902.
    Attempts and conspiracies to commit criminal
    fraud offenses.Sec. 903. Criminal penalties for
    mail and wire fraud.Sec. 904. Criminal penalties
    for violations of the Employee Retirement Income
    Security Act of 1974.Sec. 905. Amendment to
    sentencing guidelines relating to certain
    white-collar offenses.Sec. 906. Corporate
    responsibility for financial reports.

35
SOX - continued
  • TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITYSec.
    1101. Short title.Sec. 1102. Tampering with a
    record or otherwise impeding an official
    proceeding.Sec. 1103. Temporary freeze authority
    for the Securities and Exchange Commission.Sec.
    1104. Amendment to the Federal Sentencing
    Guidelines.Sec. 1105. Authority of the
    Commission to prohibit persons from serving as
    officers or directors.Sec. 1106. Increased
    criminal penalties under Securities Exchange Act
    of 1934.Sec. 1107. Retaliation against
    informants.

36
IV. Measures Company can Take
  • Code of ethics
  • Chief Ethics Officer
  • Ethics committee
  • Ethics hotline
  • Mandatory ethics training

37
  • An open, transparent and ethical corporate
    culture is much more effective than rules-based
    approach!
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