Part 2: Section F

Professional Ethics

Topic 1.1 Principles and Standards of Professional Ethics

I. Can Ethics Be Taught?

A. Most individuals consider themselves to be ethical. And most individuals in fact
value ethics and expect themselves to act ethically. The fundamentally inherent
desire to choose to be ethical is difficult to teach. It is a personal value that
reflects a lifetime of experiences, choices, and relationships.
B. However, nearly everyone can strengthen their understanding of, and their
discipline for, acting ethically in various situations. Too often accounting and
finance professionals (and everybody else!) find themselves caught by surprise in
a situation that turns out to be very much a matter of ethics.
C. It's difficult to always act with a high level of intentional ethics when
unanticipated circumstances are thrust upon us. And it's difficult to make wise
ethical choices when we're not sure exactly what is the ethical problem in the
situation. Hence, accounting and finance professionals can always improve their
ability to be ethical in two specific ways.
1. Recognizing and anticipating when ethics will be challenged in a
particular situation.
2. Recognizing and describing exactly how ethics are being challenged in a
particular situation.
D. Bottom line: Everyone can be more conscientious about ethics. This
conscientiousness is a learned skill and can be taught.
II. Keep It Personal
A. In addition to improving our ethical skills, we need to also stay energized about
our personal commitment to ethics. Many professionals find that when presented
with difficult decisions that challenge ethics at a very personal level, the personal
commitment needed to make the hard decision can be energized by asking oneself
the following question: Would the person you most love and admire be proud to
watch the decision you're about to make?
B. Evidence of your commitment to ethics is tied very closely to your “personal
brand.” Organizations spend significant resources to guard and strengthen their
brand in the marketplace. Each of us as a business professional has a personal
brand, and a single decision, for good or bad, can have an incredible and long-
lasting impact on that personal brand.
C. Remember that “Perception = Reality.” Not only do you need to make ethically
based decisions, but the ethics in your decisions must to be clear to others around
you. Like it or not, the perception that others have of you as an ethically based
professional is what matters, despite any argument you might want to make that
your ethics are not being perceived correctly. Hence, be sure that the ethics in
your decisions and actions are clear for others to see.
III. IMA Statement of Ethical Professional Practice—Principles
A. The IMA (Institute of Management Accountants) has an important brand, and
continually invests significant resources to strengthen that brand across the world.
An important element of the IMA brand is represented in explicit principles and

Page 1 of 22
 Part 2: Section F
Professional Ethics

standards of professional ethics as described in the IMA Statement of Ethical

Professional Practice.1
B. IMA members are expected to fully comply with the IMA Statement of Ethical
Professional Practice. The IMA Statement distinguishes between two separate
but related views on professional ethics:
1. Overarching principles that express ethical values, and
2. Specific standards that guide ethical conduct.
C. The IMA Statement lists four overarching ethical principles to guide member
conduct. These principles, and more specific descriptions, follow below.
1. Honesty. IMA members should be honest and truthful in their professional
communication and in their professional analysis and work.
2. Fairness. IMA members should be fair and balanced, without favoritism,
in their professional work and decisions involving other colleagues and
stakeholders.
3. Objectivity. IMA members’ analysis and decision making should be
reasoned, thorough, and dispassionate.
4. Responsibility. IMA members are responsible to comply with and uphold
the standards of Competence, Confidentiality, Integrity, and Credibility.
D. Note that the last IMA guiding principle, Responsibility, is the bridge to the
IMA's standards of ethical conduct.
IV. IMA Statement of Ethical Professional Practice—Standards
A. After listing the four overarching principles, the IMA Statement then describes
four specific standards of ethical conduct. These standards are crucial as failure to
comply may result in disciplinary action by the IMA. Each of these standards is
detailed across several specific descriptions.
B. The first IMA standard of conduct is Competence. IMA members with ethical
competence will demonstrate the following specific characteristics.
1. Maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations,
and technical standards.
3. Provide decision support information and recommendations that are
accurate, clear, concise, and timely. Recognize and help manage risk.
C. The second IMA standard of conduct is Confidentiality. IMA members who take
an ethical approach to confidentiality are committed to the following processes.
1. Keep information confidential except when disclosure is authorized or
legally required.
2. Inform all relevant parties regarding appropriate use of confidential
information. Monitor to ensure compliance.
3. Refrain from using confidential information for unethical or illegal
advantage.
D. The third IMA standard of conduct is Integrity. IMA members who have integrity
in their conduct specifically engage in the following professional practices.

Page 2 of 22
 Part 2: Section F
Professional Ethics

1. Mitigate actual conflicts of interest. Regularly communicate with business

associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit
the profession.
4. Contribute to a positive ethical culture and place integrity of the
profession above personal interests.
E. The fourth and final IMA standard of conduct is Credibility. IMA members who
are credible in their conduct will be observed to do the following.
1. Communicate information fairly and objectively.
2. Provide all relevant information that could reasonably be expected to
influence an intended user's understanding of the reports, analyses, or
recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or
internal controls in conformance with organization policy and/or
applicable law.
4. Communicate professional limitations or other constraints that would
preclude responsible judgment or successful performance of an activity.
F. A careful study of the specifics involved in each IMA standard of professional
ethics, and a candid assessment of one's personal practice with respect to these
standards, will help finance and accounting professionals better assess individual
situations to directly recognize and successfully respond to ethical conflicts.

Practice Question
You have recently been hired as an accountant for the largest residential construction company in
the state. Your primary responsibility is to track costs for each home being constructed. Tracking
the costs for direct materials and direct labor is relatively straightforward. Accounting for
manufacturing overhead costs, on the other hand, presents a challenge. The company's current
practice is to allocate overhead costs on the basis of direct labor hours. As a result, larger houses
that require more labor construction time are allocated a larger share of the overhead. While
larger homes do tend to require more management and engineering design support, this is not
always true. Hence, you've been working on an activity-based costing system to improve the
overhead cost assignment process.
Your company was recently selected by the state to build a number of low-income housing
complexes. The state has agreed to an arrangement whereby it will pay costs plus a 10% profit
margin. Construction of these low-income housing units will be relatively simple. These smaller
buildings are based on a straightforward design used consistently for each house. Compared to
the average house the company builds for the open market, these government project houses will
require substantially less management and engineering support.
At a meeting following the granting of the construction contract by the state, the production
supervisor proposes the following idea:

Page 3 of 22
 Part 2: Section F
Professional Ethics

 Since the state has agreed to pay our costs plus 10%, the higher the costs on the project,
the more money we make. What we need to do is to funnel as much overhead cost as we
reasonably can to this low-income housing project. Now I don't want anyone to think I
am proposing something unethical. I am not saying that we should charge the state for
fictitious costs. I'm simply proposing that we allocate overhead cost on a per-house basis
with each house, regardless of size, being allocated the same amount of overhead.

As the cost accountant for the company, it is clear to you (and you believe it is clear to everyone
else) that allocating overhead costs to a constant amount per house instead of per direct labor
hour will shift a substantial amount of overhead in the organization from the company's core-
product homes that are priced competitively in the open market to the government-project homes
that are priced based on cost. This approach would be a significant misrepresentation of how
overhead costs are actually created in the organization. If this cost assignment proposal goes
forward, you will be the one expected to design and deploy the new system. You can see that
most in attendance at the meeting are being persuaded by the production supervisor's idea.
The IMA Statement of Ethical Professional Practice provides very specific descriptions of
ethical conduct for each of its four standards of behavior. Carefully consider those descriptions
in light of this scenario, and indicate for each description if it applies to the scenario. More
specifically, your determination can be one of three levels: (1) Clearly applies,
(2) Maybe applies, and (3) Does Not apply.
Answer:
(Note that this is a subjective analysis. Be sure that you understand your response in comparison
to the suggested solution below.)

Page 4 of 22
 Part 2: Section F
Professional Ethics

Summary
It is challenging, and perhaps unlikely, to successfully teach an individual to change his or her
fundamental and personal values with respect to ethics. But it is very likely, and absolutely
crucial, that we teach, learn, and improve our ability to specifically recognize and successfully
address a variety of ethical challenges and conflicts in business. The IMA Statement of Ethical
Professional Practice provides valuable guidance on principles and standards of ethics that can
help IMA members better practice their ethical values as business professionals. IMA principles
describe the specific values that should describe IMA members who are committed to be ethical
professionals. These four principles are Honesty, Fairness, Objectivity, and Responsibility. The
IMA Statement then goes on to specifically describe four standards that should guide the ethical
conduct of IMA members. These standards are Competence, Confidentially, Integrity, and
Credibility. Each of these standards has very specific subcomponents that should be thoughtfully
considered in addressing all business processes, analyses, and decisions.

Page 5 of 22
 Part 2: Section F
Professional Ethics

Topic 1.2 Resolving Ethical Issues and Controlling Fraud

I. The Fraud Triangle

A. Fraud is formally defined as “wrongful or criminal deception intended to result in
financial or personal gain.” Accounting and finance professionals, particularly
those who belong to the IMA (Institute of Management Accountants), are
expected to understand, watch for, and control fraud.
B. The best way to anticipate and control fraud is to know the warning signs. The
Fraud Triangle is a research-based and well-tested model for recognizing
conditions that create incentives for fraud. There are, in fact, three conditions that
create increasing motivation for individuals and organizations to engage in fraud.
These three conditions are: Financial Pressure, Opportunity, and Rationalization.

1. There is no particular order of sequence for these conditions. Each

condition is independent of the others; that is, one condition doesn't
necessary lead to another condition.
2. It isn't necessary for all three, or even one, of these conditions to be
present in order for fraud to occur. But as each condition comes into a
situation, risk increases and you should pay increasingly close attention to
the potential for fraud.
3. In addition to watching others based on motivation represented in the
Fraud Triangle, it is even more crucial to watch yourself as any of these
three conditions begins to appear in your own circumstances.
C. Financial Pressure for fraud can be either negative or positive. Negative
Financial Pressure is taking place when an individual or group is in a bad
financial situation (e.g., heavy debt) that does not appear to be resolvable using a

Page 6 of 22
 Part 2: Section F
Professional Ethics

legal route that isn't somehow humiliating. Positive Financial Pressure is taking
place when an individual or group is facing a great financial opportunity that
doesn't appear to be accessible using a legal route available to the individual or
group.
D. Opportunity for fraud is represented by a situation that makes it easier to engage
in fraud. Generally, these situations involve a lack of strong internal controls in
the organization. Opportunity for fraud is also present when an individual or
group has an extraordinary ability or is in an extraordinary position providing
greater ability to successfully engage in a fraudulent process.
E. Rationalization for fraud is essentially about “telling a story.” Fraudsters
generally need to rationalize the fraud with their own internal moral compass. In
order to do this, often the individual or group will see themselves as a “victim” of
the organization that will be defrauded. Alternatively (or perhaps, in addition), the
individual or group will strengthen the Rationalization based on external factors
such as the need to help someone else, such as family or friends; or based on the
perceived bad behavior of a fellow employee or supervisor, which somehow
creates a favorable comparison.
II. Resolving Ethical Issues
A. When confronted with an ethical dilemma, it is important to be rational and
thoughtful. Stress and fear can lead to reactive decisions that further complicate,
or even worsen, the situation. The IMA Statement of Ethical Professional
Practice provides guidance to help its members resolve ethical situations.
B. The first counsel provided by the IMA Statement is to not ignore an ethical
situation. As the accounting or finance professional in the organization, and
particularly as an IMA member, you need to take action when you encounter an
ethical situation or dilemma. It is tempting to ignore the situation, but lack of
action almost always leads to a worsening situation, and may implicate you since
you likely have a professional expectation to deal with these kinds of situations.
C. However, before taking any action, it is important to thoughtfully consider all
risks involved by your choices. Consider the possibility of retaliation by
individuals or groups in your organization. Be wise. There are likely paths
available in the situation that would be personally risky for you and may be
unwise to pursue. Nevertheless, it may be that the right decision will put you at
some professional risk. Be sure, though, that you've carefully explored all
possible paths before taking action.
D. To help you fully consider your choices in responding to the situation, your first
focus should be your own organization's policies and procedures with respect to
ethical practice. Hopefully, your organization has policy and guidance in place
that you can reference. If not, or if you believe the policy is irrelevant or even
inappropriate, then you can and should consider other resources for guidance.
E. Often, your first line of discussion should be your own supervisor. Be very careful
about communicating with individuals above or outside of your line of authority.
There are conditions when it would be unwise to discuss the situation with your
own supervisor, but those conditions almost always involve clear evidence that

Page 7 of 22
 Part 2: Section F
Professional Ethics

your supervisor is involved in perpetuating or consciously allowing the unethical

situation, and any discussion with your supervisor would have undesirable results.
F. If discussion with your immediate supervisor can't resolve the situation, you
should escalate the discussion to the next management level in your organization,
but only to the next level. If needed, continue to proceed to the next higher level,
including eventually contacting the board of directors or owners.
G. The IMA provides an anonymous ethics helpline for its members. After a
preliminary discussion of the problem to determine the kind of ethics issue being
reported, a member of IMA's Committee on Ethics will telephone the caller, if
desired, to help them understand and apply the provisions of the IMA Statement of
Ethical Professional Practice. Confidentiality is maintained at all times. The IMA
cannot provide a specific resolution but will discuss how the issue relates to the
provisions of the IMA Statement.
1. The Helpline number for callers in the United States and Canada is (800)
245-1383.
2. In other countries, dial the AT&T USA Direct Access number
from www.att.com/esupport/traveler.jsp?tab=3, then the above number.
H. Do not hesitate employing your own attorney in ethical situations where the best
path of resolution is not clear to you. Too often professionals will hesitate to
invest in good legal counsel. Remember that when the dilemma involves ethics,
your professional career and personal brand on are the line. Good legal counsel is
often a good investment.
I. Finally, once all other avenues for resolution have been exhausted, consider
resigning from your organization and making clear to the proper
management within your organization the reason for your departure. It is
important to note that the IMA Statement at no time recommends disclosure of
the ethical situation to outside groups, such as the news media or social media.
Remember that confidentially is a key standard of professional ethics for IMA
members.

Practice Question
The previous lesson (Topic 1, Lesson 1) described a scenario wherein you were recently hired as
the cost accountant for a large residential construction company. The company has been selected
by the state government to build low-income housing in a contract that bases price on cost plus a
10% profit margin. At a management meeting you are attending, the senior production
supervisor has proposed a cost allocation system to shift an inappropriate (i.e., unethical) amount
of overhead costs from its normal open-market housing projects to this government housing
project. The supervisor notes that the company is not creating “fictional costs” on the
government contract—simply changing the overall allocation system to adjust the assignment of
costs. You can see that most in attendance at the meeting are being persuaded by the production
supervisor's idea.
Using the Fraud Triangle, what are the motivations for those at the management meeting to
support this proposal?

Page 8 of 22
 Part 2: Section F
Professional Ethics

Using guidance in the IMA Statement of Ethical Professional Practice, what pathway might you
follow to resolve this situation?
Answer:
The Fraud Triangle identifies three types of motivation to engage in fraud: Financial Pressure,
Opportunity, and Rationalization. With respect to Financial Pressure, this is likely a big contract
for the company with significant profit opportunity at stake. Further, the company may be
currently pressured by low overall profits, which puts pressure on management to artificially
elevate price on the government housing project. With respect to Opportunity, the company
effectively now has two business lines—one with competitive price pressure (the open-market
projects) and one with no competitive pressure (the government housing contract). To the extent
the state audit on the contract is less than adequate, there is opportunity to shift overhead costs
within the organization. Finally, with respect to Rationalization, the production supervisor is
clearly “telling a story” with respect to his position that the costs being assigned to the project
are real costs that exist in the company. No “fictional costs” are being created.
As you leave the management meeting, you clearly have an ethical dilemma. Being the new
member of the team as the recently hired cost accountant puts extra stress on you to resolve this
situation appropriately. Guidance from the IMA Statement of Ethical Professional Practicefirst
directs that you must take action, despite any temptation you have to not engage yourself. First,
be sure to access and review any company policy or procedure as guidance on how leadership in
the organization expects employees to conduct themselves with respect to ethics. Then meet with
your supervisor to discuss the situation and the company policy (if there is one). If this meeting
isn't advisable or doesn't resolve the situation, then escalate to the next management level.
Likely, at some point in these discussions, you'll encounter resistance or perhaps even duplicity.
If possible, skip that management level and proceed to the next level.
As you engage in these internal discussions, do not hesitate to access guidance and consultation
from the IMA Ethics Helpline, and even from your own attorney.
Finally, if a resolution cannot be found that allows you to be comfortable with your personal
values and to be in compliance with the IMA standards of ethical behavior, you should consider
resigning your position in the company.
Summary
One of the best ways to control and prevent fraud is the ability to recognize conditions that
motivate individuals and groups to commit fraud. The well-known Fraud Triangle describes
three conditions that create motivation to commit fraud. The three conditions are Financial
Pressure, Opportunity, and Rationalization. The IMA's Statement of Ethical Professional
Practice provides very useful guidance to help you deal with ethical dilemmas or situations as
they arise. That guidance can be listed as a series of steps as follows:

1. Take action.
2. Evaluate personal risks to yourself.
3. Follow your organization's policies.

Page 9 of 22
 Part 2: Section F
Professional Ethics

4. Discuss with your immediate supervisor.

5. If your supervisor is involved, go to the next management level.
6. Don't hesitate to use the IMA's Ethics Helpline to receive anonymous guidance.
7. Consult your own attorney.
8. If needed, resign from your organization.

Topic 2.1 Organizational Ethics and the Law

I. The U.S. Sarbanes-Oxley Act of 2002 (SOX)—Section 406

A. The Sarbanes-Oxley Act of 2002 (SOX) was a bill sponsored by and named after
members of the U.S. Senate (Paul Sarbanes) and U.S. House of Representatives
(Michael G. Oxley). It was enacted in reaction to a number of major corporate and
accounting scandals that took place largely in the years 2000 and 2001.
B. SOX applies mainly to publicly traded companies in the United States. There are
two very well-known provisions in SOX:
1. Section 302, which stipulates that senior management for publicly traded
companies must personally certify, and are personally liable for, the
accuracy of their company's financial statements.
2. Section 404, which stipulates that publicly traded companies must
establish an internal control system and have that system audited by
certified public accountants.
C. Sections 302 and 404 have important implications for the management of ethics in
an organization. However, this lesson focuses on Section 406, which states that a
code of ethics, along with appropriate training, must be provided for senior
financial officers of publicly traded companies.
1. Senior financial officers are defined at a minimum to be the top finance
officer (generally, the CFO) and the top accounting officer (generally, the
controller, comptroller, or chief accountant).
2. The Securities and Exchange Commission (SEC) is charged with defining
and enforcing SOX for companies. The SEC generally expects the chief
executive officer (CEO) to also be in compliance with Section 406.
D. An effective code of ethics for senior financial officers should include
commitments to the following:
1. Honest and ethical conduct, including the ethical handling of conflicts of
interest.
2. Full, fair, accurate, timely, and understandable disclosure in the financial
reports.
3. Compliance with applicable governmental rules and regulations.
E. Remember that Section 406 only requires a code of ethics and training in ethics
for senior financial officers. However, compliance with this law should create
resources, incentives, and momentum for a code of ethical conduct to be
established and deployed effectively across the entire organization. (Our next

Page 10 of 22
 Part 2: Section F
Professional Ethics

lesson will explore the process of creating a company-wide code of ethical

conduct.)
II. The U.S. Foreign Corrupt Practices Act of 1977 (FCPA)
A. In the mid-1970s, hundreds of U.S. Companies were making questionable
payments to foreign government officials. Generally, these payments were
described as a “commission” or a “facilitating payment” paid to a local
government officer and were considered to be necessary in order to enact business
in that country.
B. The U.S. Foreign Corrupt Practices Act (FCPA) was established in 1977 to define
and enforce against bribery of foreign officials. Essentially, FCPA forbids any
“American” to pay bribes to a foreign government or representative to obtain
contracts or secure business.

FCPA also includes mandates related to accounting transparency and internal

controls. Subsequent laws and regulations have strengthened and expanded
internal control requirements for U.S. companies.

C. The “nationality principle” of FCPA defines that this law applies to both
companies and individuals, whether or not the company or individual is
physically present in the United States. Specifically, FCPA jurisdiction includes:
1. Any U.S. business, or any foreign corporation that has a class of securities
registered in the United States.
2. Any individual who is a citizen, national, or resident of the United States.
3. Any foreign businesses or persons who make a corrupt payment while
physically present in the United States.
D. FCPA governs payments to foreign officials, candidates, and parties. FCPA also
applies to any other payment if part of the bribe ultimately ends up with a foreign
official, candidate, or party.
E. Finally, the size of the payment does not matter in terms of whether the payment
is considered to be a bribe for FCPA purposes. The issue is the intent of the
bribery rather than the amount. Further, FCPA applies not only to monetary
payments, but also to disbursements or gifts of any kind of value.
F. Of course, the challenge for companies is how to get work done in countries
where the expectation of a “commission” to local government officials is
commonplace. This challenge is increasingly more prevalent as advances in
technology and travel bring together different cultural norms of behavior. Hence,
the risk of ethical challenge is part of the complexity of risks that exists when
conducting business across international lines. There is great reward for
organizations that figure out how to engage successfully and ethically in
international business.

Practice Question
You've been recently hired as the controller for a company that over the last three years has been
developing a new business segment in a small but strategically crucial foreign country.

Page 11 of 22
 Part 2: Section F
Professional Ethics

Establishing good relations with that country's Office of Foreign Trade has been particularly
central to the success of launching the new business segment. In the last visit to that country, you
accompanied the CEO and several other executive officers, including the CFO. On the plane ride
over, the CEO described the gift he was bringing to the Minister of Foreign Trade. The gift is
significant in terms of its value, so much so that you commented with surprise. The CEO
responded he had been advised on the last trip that the size (i.e., value) of the gift was important
to this Minister who expected the gift exchange to demonstrate the seriousness of the company's
commitment to the country and its economy. As the discussion continued, the CFO expressed her
hope that the CEO's gift would be adequate as she believed that the Minister would either
smooth over some regulatory demands or delay and enhance regulatory compliance processes
based on how the gift was received.
What concerns do you have in this situation with respect to the Sarbanes-Oxley Act (SOX) and
the Foreign Corrupt Practices Act (FCPA)?
Answer:
Since neither the CEO nor the CFO seemed to indicate any ethical concerns in this situation, this
suggests that there is either an inadequate Code of Ethics for senior financial officers or
inadequate training on that Code of Ethics in this company. More specifically, SOX Section 406
stipulates that senior financial officers, including the CEO, must conduct themselves honestly
and ethically and be in compliance with applicable governmental regulations. In the case of this
substantial gift, and the expectation that it will help facilitate business in the foreign country,
there is potentially a serious breach of compliance with FCPA. These senior officers do not seem
to be considering certain FCPA requirements that specifically restrict against providing gifts to
foreign officers with the expectation or hope that delivery of the gift (regardless of monetary
value) will secure or improve business prospects or processes.
Summary
Compliance with the law is essential and is the first step toward establishing an ethics-based
organization. To this end, two particularly crucial laws affecting organizations and professionals
are the U.S. Sarbanes-Oxley Act of 2002 (SOX) and the U.S. Foreign Corrupt Practices Act of
1977 (FCPA). Both laws are enforced by the Securities and Exchange Commission (SEC). SOX
Section 406 stipulates that a code of ethics, along with appropriate training, must be provided for
senior financial officers of publicly traded companies. FCPA makes it illegal for companies and
individuals to pay any type of bribe to a foreign government or official in order to secure a
business need or advantage.

Topic 2.2 Ethics and the Organization

I. Enterprise Risk Management

A. Enterprise Risk Management (ERM) is the process of planning, organizing,
leading, and controlling the activities of an organization in order to minimize the

Page 12 of 22
 Part 2: Section F
Professional Ethics

effects of risk. A key characteristic of effective ERM is the alignment of

employee behavior with an ethical code of conduct.
B. Individual behavior is a vital aspect of managing risk. There are many stories of
how the decisions or actions of a single employee either destroyed the reputation
and viability of an organization, or firmly established the organization as a
sustainable and contributing member of its business community.
C. The challenge of managing ethical decisions and actions of individuals increases
as the organization expands in size. When the organization is small, the owner or
key executive is clearly in sight of everyone. Within that line of sight, the owner
or key executive is better able to plan, organize, lead, and control everyone in the
organization to align their work with desired values and principles.
D. As the organization increases in size, employees will be more disconnected from
the values and principles that define the strategy of the owner or key executives.
Significant risk exists in that vacuum of leadership in the day-to-day work of
employees—risk that unethical decisions will be made.
II. An Ethics Culture
A. It must be emphasized that the risk of unethical decisions by employees is not
solely about illegal actions. The previous lesson focused on compliance with two
key laws governing decisions and actions of organizations. However, being in
compliance with SOX and FCPA does not mean that the organization is ethical.
B. SOX Section 406 stipulates that a Code of Ethics be established for senior
financial officers. But a written code is not enough. Too often organizations have
a clear mission and statement of values; that is, “clear” in the sense that
expectations have been written and published in the organization. But just as
ethics is more than being legal, ethics is also more than a statement of words. An
ethically based organization is established on a strong culture and clear,
actionable principles that guide conduct.
C. Culture and principles are crucial. Large organizations working with fast-paced
processes in increasingly competitive economies don't have the ability to institute
an increasingly larger list of specific rules to guide every possible action or
decision by their employees. Such an approach will always fall behind the needs
of employees for direction and support. Instead, organizations need to design a
system for ethical conduct that is based on principles and standards and is guided
and supported by leaders who are committed and capable to the demands of
professional ethics.
III. A Framework for Creating a System of Ethical Conduct
A. Establishing a principles-based code of conduct that provides clear guidance and
aligns employee decisions and behavior with the mission and values of the
organization is central to successful risk management. An effective system of
ethical conduct is also core to a successful internal control system.
B. Building a system of ethical conduct across the whole organization requires a
significant investment of resources and management focus. In one of
its Statements on Management Accountant (SMA), Values and Ethics: From
Inception to Practice, the IMA lays out a framework for creating such a system.1

Page 13 of 22
 Part 2: Section F
Professional Ethics

This framework is illustrated below.

C. With the clear support of top leadership, the organization forms a cross-functional
team to design and implement a system of ethical conduct across the organization.
Beginning with Step 1, the team evaluates the current understanding of,
commitment to, and practice of professional ethics in the organization. With Step
2, the team, working with top leadership, determines clear objectives of
professional ethics for the organization. Note that Steps 1 and 2 are an “audit” that
effectively forms a gap analysis with respect to current practice of professional
ethics. With that gap analysis in hand, the team is able to proceed forward to the
next steps in the framework.
D. Take a look at Steps 3 and 4 above. Do you see a connection with the IMA
Statement of Ethical Professional Practice that we studied earlier in Lesson 1?
Remember that the IMA Statement distinguishes between two separate but related
views on individual professional ethics:
1. Overarching principles that express ethical values, and
2. Specific standards that guide ethical conduct.

Page 14 of 22
 Part 2: Section F
Professional Ethics

E. Similarly, principles describe the values of the organization and essentially

determine what the organization is expected to be or become. These principles are
used to establish actionable standards. Standards describe the conduct of the
organization and essentially determine what the organization is expected to do in
every decision setting.
F. With the gap analysis completed in Steps 1 and 2, and clearly defined principles
and standards established in Steps 3 and 4, the next step is working with the
leadership of the organization.
IV. Ethics and Leadership
A. In Step 5 of the Framework, the design and implementation team works to
institute the necessary training and incentives to ensure that top managers
understand and are committed to the organization's newly defined principles and
standards of professional ethics.
B. Leadership is the foundation of an ethical organization. The phrase “tone at the
top” describes a clear signal and consistent example of ethical practice by the
organization's executive team. If the company's mission statement describes an
expectation of ethical practice, but the tone at the top of the organization is
inconsistent with that mission statement, we can expect problems with
professional ethics throughout the organization.
C. There is a well-known adage, “Your actions speak so loudly, I cannot hear what
you are saying.” Employees believe what they see rather than what they are told
in the company “pep talk,” and that belief will inform their decisions. Employees
consider the top management team as ultimately responsible for the firm's moral
authority and that it should be held to a higher standard. Hence, senior managers
must avoid creating the perception that they are “above the rules.”
D. As can be seen in the illustrated framework above, leadership is the foundation of
a system of ethical conduct in the organization. Once key managers are trained
and committed to the organization's principles and standards of ethics, then the
detailed work can begin to train, control, and evaluate the system of professional
ethics throughout the organization. This work forms Steps 6, 7, and 8 in the
framework above, and will be the focus of the next lesson.

Practice Question
Rosenbloom, Inc., is a fast-growing residential landscaping company with operations throughout
the southern United States. After an overpricing incident at one of its offices became a bit of a
scandal in the local press, the Rosenbloom executive team determined to launch a stronger and
more explicit system of ethical conduct throughout the company. A cross-functional team was
established to design and deliver the new system. This team is composed of the executive vice-
president of Human Relations (HR), the assistant controller, the social media manager,
operations supervisors from two different local offices, and crewmembers from two other local
offices.

Page 15 of 22
 Part 2: Section F
Professional Ethics

According to the IMA Statement on Management Accounting, "Values and Ethics: From
Inception to Practice," what are the initial steps for this team to accomplish before it begins
rolling out a new system of ethical conduct throughout the company?
Answer:
The first effort for the team should be a gap analysis of the company. This involves two steps.
First, the team needs to evaluate the current state of understanding and practice of professional
ethics across the organization. This can be done by conducting interviews, reviewing current
training, evaluating all incidents involving ethics, etc. Next, the team needs to work with the
Rosenbloom executive leadership team to determine what are the company goals for professional
ethics across the organization. Comparing current and desired practices forms the gap analysis.
With that gap analysis in hand, the next step is for the team to work with the executive leaders to
identify core principles and values for Rosenbloom. With a clear grasp of core principles, the
team then moves forward to design clear standards of ethical conduct that employees should be
able to confidently reference in the day-to-day operations throughout Rosenbloom.
The final step before the team can begin rolling out the new system of ethical conduct throughout
the company is to work carefully with the executive leadership and other key managers to ensure
that these leaders understand and are thoroughly committed to the new system. If the “tone at the
top” is not obviously aligned with the new system of ethical conduct, the message will be
subsequently lost on employees, and Rosenbloom will continue to be at risk of unethical events.
Summary
Establishing a system of ethical conduct is crucial to ERM (Enterprise Risk Management) in the
organization. The act of a single employee can make or break the organization. As the firm
becomes larger, employees naturally become more and more disconnected from the core values
of the owners and key executive, unless a significant investment is made to establish an ethical
culture and clear principles to guide decisions and actions in an increasingly complex
organization and competitive environment. The IMA Statement on Management Accounting laid
out in this lesson describes an eight-step framework for creating a system of ethical conduct
throughout the organization. Steps 1 and 2 in the framework are a gap analysis of the current
state of ethics in the organization, and where the organization needs to be. In Steps 3 and 4 the
organization develops a statement of values (or principles) and a code of conduct to provide
actionable guidance to all employees. Step 5 then begins the rollout process by training key
leadership in the organization's own principles and standards of ethical conduct. The remaining
steps are discussed in the next lesson.

Topic 2.3 Ethics and HR Management

I. Human Capital
A. Most organizations make significant investments in capital assets, such as land,
buildings, machinery, patents, and trademarks. These investments are carefully

Page 16 of 22
 Part 2: Section F
Professional Ethics

considered before being made, and subsequently carefully managed and evaluated
to be sure that the investment pays off in terms of cash or income flows. Most
organizations, though, spend considerably more resources on human capital,
which includes the health, knowledge, motivation, skills, and ethics of its
employees. Given the size and the potential of human capital versus traditional
capital assets, most organizations are committed to making smart investments in,
and effectively managing, their human capital for long-term value. This work is
both crucial and strategic to the organization.
B. Remember from our first lesson that everyone can improve their professional
ethics, particularly with respect to being more conscious and aware
of specific ethical issues and how they relate to different business decisions and
activities. Hence, organizations can establish specific expectations and
make specific investments to strengthen the ethical practice of their employees,
which is a crucial aspect of the human capital in the organization.
C. If you are familiar with the traditional Balanced Scorecard framework, you'll
remember that at the foundation of this strategic management model is the
“Learning & Growth Performance” perspective (see below). Learning and growth
is not entirely about employees. This perspective includes the development of
systems and structure in the organization as well. But if establishing better
professional ethics in the organization is a strategic imperative, then building a
clear and effective system of ethical conduct by employees certainly falls squarely
in this perspective.

II. Operational Development

A. In the previous lesson, we studied the first five steps of an eight-step framework
for building a system of ethical conduct as described in the IMA's Statement on

Page 17 of 22
 Part 2: Section F
Professional Ethics

Management Accounting (SMA), Values and Ethics: From Inception to Practice.

The last three steps of this framework are depicted below. Each of these steps
involves significant and detailed work.

B. Step 6—Operational Development of Ethical Practice—is perhaps the most

detailed and intensive work in the process of establishing strong professional
ethics across the entire organization. There are essentially three aspects to this
work. The first aspect involves investments in the three core HR processes to
institute a focus on professional ethics. The three core HR processes are:
1. Carefully hiring employees who are personally committed to professional
ethics
2. Deploying solid training in professional ethics
3. Establishing effective incentives to practice professional ethics
C. The second aspect of Step 6 is a careful review and, as necessary, a reengineering
of the core operational processes in the organization to ensure that these processes
are anchored on ethical practices. For most organizations, there are three core
operational processes as follows:
1. Research and development (R&D) processes
2. Production processes
3. Post-sale service processes
D. Once the internal processes (i.e., HR process and operational process) are
grounded in professional ethics, the third and final aspect of implementing Step 6
is to turn attention to partnering with external suppliers to ensure that the supply-
chain process has a clear ethical orientation. This work may include reviewing
and restructuring some supply-chain relationships.

Page 18 of 22
 Part 2: Section F
Professional Ethics

III. Monitoring and Measuring

A. Step 7—Monitor Ethical Behavior and Measure Results—is primarily about
establishing an internal control system around ethical behavior in the
organization. The IMA SMA on Values and Ethics recommends three well-known
business processes as highly effective methods for strengthening internal controls
on ethical processes. Remember, “You can't manage what you don't measure.”
B. Business process reengineering (BPR) involves periodically returning back to the
original design phase of the company's ethics system to completely evaluate every
aspect to determine how the system can be better built, and then rebuilding and
redeploying the system.
C. Total Quality Management (TQM) is fundamentally a teams-based approach to
create a high-quality ethics system with zero tolerance for error. TQM is about
moving the responsibility for high-quality ethics from a few individuals to an
ownership by the whole organization.
D. Continual process improvement (CPI) is a mindset of constantly evolving the
organization's system for ethical conduct not only in response to the ever-
expanding demands of business and competition, but also anticipating those
demands by continuously investing in improved ethical practice.
IV. Feedback and Improving
A. Step 8—Gather Feedback and Make Improvements—is used to establish a
feedback loop environment in the organization, both for individual employees and
for the organization as a whole.
B. There are various methods organizations can employ to build feedback loops for
employees to support continuous improvement in professional ethics. These
methods include annual reviews that include feedback on ethical performance.
The employee feedback can be gathered using a 360-degree input process
whereby feedback on ethical performance is gathered from multiple perspectives
on the employee, including his or her supervisor, peers, subordinates, clients, and
suppliers. Rather than be scheduled “as needed,” refresher training events on
professional ethics should take place regularly. And awards, recognitions, and
other celebration events can be used to reinforce and exemplify excellent ethical
performance.
C. The organization itself needs to evolve its own feedback and learning system. One
obvious approach is to invest in survey systems of employees, clients, suppliers,
and other stakeholders. If designed well, these surveys can capture candid and
helpful feedback to help map the organization's progress toward the onset of an
ethical culture that contributes significantly to both a successful enterprise risk
management program and a sustainable company strategy. An ethical culture is
the culminating objective of a management campaign to build and deploy a
system of organization-wide ethical conduct, as illustrated once again in the
framework below.

Page 19 of 22
 Part 2: Section F
Professional Ethics

V. A Whistleblower Framework
A. We'll conclude this last lesson on professional ethics by describing a particularly
powerful method for feedback and improvement in support of the organization's
commitment to ethics. This method is a whistleblower framework. This
formidable management tool effectively gives everyone in the organization the
right and responsibility to say, “Stop! This isn't right. We need to address this
situation.” There are six very specific facets of a successful whistleblower
framework in an organization.
1. Everyone needs to be trained in what whistleblowing means and how it
will specifically work in the organization.
2. Everyone needs to feel safe in a whistleblowing framework. Hence, there
needs to be clear and effective protection systemsestablished to encourage
everyone to take action when needed.
3. Anonymous helplines are then set up to capture whistleblower reports.
4. There are differences between concerns and grievances, and those
differences should be described in the training process. But employees

Page 20 of 22
 Part 2: Section F
Professional Ethics

should be encouraged to report both concerns and grievances, and let the
whistleblowing process distinguish between the two.
5. An independent analysis is set up to distinguish between concerns to be
considered and serious grievances that must be addressed. Those
designated to provide these analyses must be independent and empowered
to move forward appropriate concerns and grievances directly to those
responsible to address the report.
6. When the grievance is serious enough, the reporting system in the
independent analysis must be able to provide direct feedback to directors
and owners.
B. Establishing a successful whistleblower framework is a serious investment in the
practice of professional ethics. If done well, the result should be a significant
reduction of the potential for ethical failure, which is a major contribution to
enterprise risk management in the organization.

Practice Question
Continuing from the previous lesson, Rosenbloom, Inc., a fast-growing residential landscaping
company with operations throughout the southern United States, is working through the design
and delivery of a new system of ethical conduct across its entire organization. At this point, it has
completed a gap analysis of ethical practice, defined its values and standards for ethical practice,
and thoroughly trained and committed its executive leadership team to ethical practice.
According to the IMA Statement on Management Accounting, "Values and Ethics: From
Inception to Practice," what are the remaining steps for Rosenbloom's cross-functional
implementation team to accomplish as they roll out a new system of ethical conduct throughout
the company?
Answer:
With the vision and mission of ethics effectively defined for Rosenbloom, and its executive team
fully trained and committed, the implementation team is ready to begin the detailed and
challenging work of operational development of ethical practice. This is the next step in the IMA
framework for creating a system of ethical practice. Operational development of ethical practice
is threefold. First, HR processes for hiring, training, and incentivizing need to be carefully
anchored to the organization's values and standards. Second, processes throughout the
organization's core operations involving R&D, production, and service-after-sale need to be
evaluated and, as needed, redesigned to assure adherence to the organization's values and
standards for ethical practice. Finally, the organization needs to consider how to strengthen
partnerships with key suppliers with respect to its values and standards.
Once the operational development of ethical practice is complete, the next step for the
implementation team is to monitor ethical behavior and measure results. A number of classic
management models can be used in this effort to capture performance measures and track
progress. These models include BPR (business process reengineering), TQM (total quality
management), and CPI (continual process improvement).

Page 21 of 22
 Part 2: Section F
Professional Ethics

Finally, the implementation team should understand that the work of establishing a system of
ethical conduct is never complete. The organization must make investments to gather feedback
and make improvements in the future. A feedback loop (i.e., learning system) is built to provide
improvement data both to individual employees and to the organization as a whole. Regular
reviews, 360-degree feedback, refresher training, and celebration events are great investments in
individual employee improvement. Regular company-wide surveys and a whistleblower
framework are valuable mechanisms to help the organization improve its overall structure for
professional ethics.
Summary
This lesson concludes our discussion of the IMA Statement on Management Accounting,
"Values and Ethics: From Inception to Practice." In the previous lesson, we described the first
five steps in a framework for creating a system of ethical conduct throughout the organization. In
this lesson, we laid out the final three steps of the eight-step framework. Step 6 is a significant
multilayered effort to develop ethical practice throughout the entire operation of the
organization, and involves work with HR management, core operating processes, and partner
suppliers. Step 7 describes the process of establishing the internal control system for ethical
practice. Measurement is a key aspect of Step 7. Step 8 involves creating a learning organization
using feedback loops that operate both at the level of each employee and for the organization as a
whole. One very powerful feedback method is the establishment of a whistleblower framework
across the organization.

Page 22 of 22