Management accountants work inside a company, handling all internal accounting data. These individual often allocate production costs, create management reports and provide support for managerial decisions. Ethical issues can result from managerial accounting activities. Like all professionals, management accountants must be sure to be ethical when working for a company.
Overproduction occurs when management accountants work in tandem with operational managers. Accountants can select a method that improves operating profits through recording more expenditures as production costs. This lowers period expenses and increases finished goods inventory. Absorption costing is the common method abused during overproduction. Operating managers and management accountants report higher profits by using absorption costing to record fixed costs in final inventory accounts.
Cost-plus contracts are common areas where management accountants can shift overhead costs from the income statement to contracts. This forces a client to pay higher prices for the same amount of goods or services. Accountants again work in tandem with operational managers to shift these costs to contracts. This incorrect allocation distorts the company’s accounting statements and potentially damages client relationships due to inappropriate contract billing.
Accountants typically work for the best interest of the company, not individual managers or executives. A conflict of interest arises when a management accountant can better his personal position by violating this principle. For example, a management accountant who helps operational managers fudge numbers can better his personal position rather than ensuring the best operational capacity for the business. Offering suggestions to improve the company rather than one segment helps reduce conflicts of interest.
Companies often need to replace assets at some point during business operations. Management accountants often review equipment and make suggestions as to which assets need replacing. Ethical issues arise, however, since new asset will often lower the return on investment a company receives from certain business projects. This occurs because the new asset has a higher cost, automatically reducing the ROI. Management accountants who do not make recommendations based on ROI impact often acts unethically.