The Importance of Ethics in Managerial Accounting

Answer

Managerial accounting is described as an activity that gives both financial and nonfinancial material to managers of an organization as well as other decision makers (Babak & Foroozan, 2012. P.90). The information provided here must be reliable and accurate, so as to be useful in decision making. Owing to this purpose of managerial accounting, this paper posits that ethics in reporting of managerial accounting information is crucial to a successful decision making process, and ultimately the achievement of an organization’s objectives.

In the current business environment, the role of accounting information is gaining solid significance. Decision makers including managers rely solely on the information provided by accountants to make their decisions. The accuracy of all decisions made depends on the reliability of the available accounting information thus the dimension of ethics in this particular profession has gained considerable weight in the recent past (p.92). Management accountants are required to make ethical choices in various settings. Four innate psychological processes often give rise to phenotypically observable behavior: ethical sensitivity, motivation, judgment and character (p.91).

The main roles of the management focuses on two pillars: planning and controlling (p.94). The former includes setting out specific objectives and providing an outline on how to achieve them; while the latter constitutes of the steps taken to ascertain that the objectives are met. To effectively carry out these managerial functions and responsibilities, managers need reliable information, both financial and nonfinancial. Usually, this information relates to the organization’s costs, which are classified in numerous categories, based on the immediate needs of the management. Current cost data is normally used in making decisions, which requires that they be as accurate as possible (p.94).

Ethical improprieties committed by accountants can be damaging to both the organization and the society in general. It can lead to mistrust by the stakeholders including managers, investors and the general public, who rely on the information provided to make decisions (p.95). The ultimate effect is the disruption of the efficiency of the capital market activities. Thus, it is unanimously agreed that, due to the importance of such information, and otherwise the damaging effects of wrong presentations, managerial accountants should, in addition to having good business, people , and technical skills;  also observe professional standards of ethics (p.95).

Managerial accounting, as opposed to financial accounting, puts much emphasis on the future. Since planning is a very important segment of the manager’s role, focus into the future must have a strong orientation. It is agreeable that changes constantly take place, and simply using a reflection of the past occurrences and transactions may not be adequate to providing a clear roadmap into the future (p.96). Consequently, reliable estimates of what are likely to happen in the future are crucial to managers in the performance of this function. When management accountants do not inculcate ethics in the information, wrong focus can be made on the future, which might lead to failure of business.

Conclusion

Ethics in managerial accounting, as described above, has four main facets, one of which is moral motivation. Basically, it involves the placement of other people’s interests before one’s own. Cultivation of ethical practices in managerial accounting would save the organization from making bad decisions, increased business costs (which can lead to poor pricing, wrong performance evaluations and inappropriate product mix), and mistrust among management and employees.