Managerial Accounting: Creating Value in a Dynamic Business Environment 12th Edition by Ronald Hilto

ethical responsibilities and ethical
standards that apply to managerial
accounting.
 107.
Award: 1.00 point
Many professions have adopted a series of ethical standards to provide guidance for their
memberships. The Institute of Management Accountants (IMA), for example, has published
standards that focus on competence, confidentiality, integrity, and credibility. In light of these
standards, consider the three cases that follow.
Case A —Leston Corporation has experienced serious financial difficulties in recent years. John
Young, the company's chief financial officer, has just learned that a major competitor was likely to
file for bankruptcy; however, he failed to disclose this information at a board meeting held later that
day when a plant closure decision was being discussed. The board evaluated several proposals
during the session that focused on improving Leston's financial position.
Case B —QBX Company manufactures fertilizer from various raw materials, including a raw material
know as Felstar. Paul Kelly, the firm's purchasing manager, purposely acquired a lower grade of
Felstar than normal because of a very attractive price. The lower-grade product resulted in
increased usage during the manufacturing process but had no effect on the fertilizer's overall
quality. An end-of-period report showed that QBX profited from Kelly's actions, with the overall
savings in purchase price more than offsetting the cost of added consumption.
Case C —Central Distributing has a participative budgeting process, allowing employees to have a
say in projected sales targets for the upcoming period. These targets are reflected in a series of
performance reports that compare actual sales achieved against targeted amounts. Hillary Baxter
submitted very low sales targets because, as she confided in a colleague, "I always want to look
good in terms of meeting targets, even if anticipated sales and closures don't materialize."
Required:
Evaluate the three cases and determine the ethical issues, if any, which are involved. Cite the IMA's
standards if appropriate.
Case A: Young had an obligation to inform the other board members about the likely bankruptcy,
particularly in light of the company's financial situation and the topics under discussion at the
meeting. The information could have affected the board's thinking on several matters. Two of the
IMA standards are relevant here: competence and credibility. Competence notes, in part, that
members provide decision-support information that is accurate and timely. Additionally, credibility
holds that members disclose all relevant information that could influence a user's understanding of
an analysis. Young's silence violates both of these ethical standards.
Case B: Kelly did not violate any ethical standards. The acquisition of sub-par material was a sound
business decision, particularly since QBX prospered financially and quality of the end product did
not suffer.
Case C: Baxter engaged in a somewhat common practice known as padding the budget;
nevertheless, one can conclude that such a practice is inconsistent with the ethical standards of
credibility and competence. Baxter is not providing full knowledge of the sales situation by setting
targets that are purposely low, thus possibly misleading managers who attempt to analyze her
performance. Additionally, competence is involved because the information provided in setting the
sales targets is inaccurate.
References
Essay Difficulty: 3 Hard Learning Objective: 01-11 Describe the
ethical responsibilities and ethical
standards that apply to managerial
accounting.