The Role of Accounting Governing Bodies in Ensuring Ethical Standards and Fiduciary Duties for Managerial Accountants

The Role of Accounting Governing Bodies in Ensuring Ethical Standards and Fiduciary Duties for Managerial Accountants

Introduction

Managerial accounting in an organization provides valuable information used by both internal and external decision-makers. Unlike financial accountancy, which focuses solely on the past, managerial accountancy focuses on the future. As a result, managerial accountants play a central role in safeguarding the public’s perception of an organization’s ethical standing. Upholding ethical standards in this enterprise function will ensure internal managers and investors have the complete and accurate information they need to make critical business decisions.

Kentucky Board of Accountancy

The Kentucky Board of Accountancy (KBA) is one of the bodies charged with regulating the accounting industry in Kentucky. The board issues licenses to certified accountants besides regulating the accounting industry. Funds used to run the body are drawn from CPAs’ registration and examinations subscription fees. The examinations are meant to keep accountants updated on their ethical and fiduciary responsibilities.

Among other functions, the board handles consumer complaints. If a managerial accountant violates state or federal regulation, consumers write their complaints to the body, which then writes a show-cause letter to the accused. Accountants who are found to have grossly violated state accountancy laws and regulations are either deregistered or penalized.

Kentucky Society of CPAs

The primary role of the Kentucky Society of CPAs is to represent the field of accountants. The body also develops its members’ educational standards by setting and administering CPA exams. Apart from helping members acquire knowledge, the body ensures adherence to standards by ensuring members adhere to ethical and technical standards.

KPMG Accounting Standards Violations

In 2019, the Securities Exchange Commission (SEC) charged KPMG with violating accounting standards. KPMG is accused of altering internal audit work after receiving stolen information that the company was due to be audited by the Public Company Accounting Oversight Board (PCAOB). PCAOB officials leaked secret documents containing information on the impending audit investigation on the Big Four firm in the hope that they would get an opportunity to work at KPMG. The trend did not just happen once, but it was a recurrence, and the PCAOB staffers who leaked the information later went to work for KPMG. While PCAOB staffers share the blame with KPMG, the latter’s sustained manipulation of audit results is a severe accounting ethics failure (Securities Exchange Commission, 2019).

Manipulation of audit results has severe repercussions on the stock market investors. For instance, it is estimated financial statements manipulation has led to the loss of $500 billion in capital investment in the US (Isa, 2011). It is not just investors who lose when companies adversely alter their financial statement accounts; it is also companies. US companies like WorldCom, Enron Corporation, and Lucent Company are just examples of companies that failed due to stock market manipulation. Enron Corporation’s collapse due to internal audit manipulation led to the loss of $70 billion in investor capital (Isa, 2011). It is the respective investors who suffer when companies manipulate their accounts and the entire market participants. Such schemes also immensely damage the real economy since resources may be potentially allocated to unproductive areas of the economy.

KPMG internal auditors are also accused of cheating in internal training exams by sharing answers and changing test results. Cheating on internal exams is a serious violation of professional standards since the exams are meant to improve the auditors’ professional standing.      Apart from the CPE requirements that auditors at KPMG are required to meet, the company requires its staff to undergo more training in excess of the state requirements. The company’s examinations are usually administered through an online platform; hence, there is a high chance of cheating. Auditors are usually given three opportunities to attempt the internal tests, and they must pass to continue working at the organization. If one fails on two attempts, their management leader is informed, attracting closer scrutiny on competence. However, when one fails all three attempts, they have to retake the entire training exercise once more. While this happens, the auditors who have not completed the training and exams successfully cannot practice. Also, KPMG may reduce the auditors’ compensation in case they fail. KPMG’s auditors could not stand the prospect of failing internal training tests, hence the motivation to cheat (Securities Exchange Commission, 2019).

Internal Audit Manipulation Prevention Controls

To prevent potential internal audit manipulation, KPMG’s lead internal auditor should consider deploying specialized audit resources to review audit data. Such may include adding an IT auditor to the review team. The inclusion of an IT auditor in the audit review team does not relieve the internal auditor from assessing the reliance on an IT system. Still, the former will play a complementary role. The internal will be responsible for analyzing audit results’ integrity, accuracy, and completeness (Stanišić et al., 2019). With an internal IT auditor, it will be possible to detect any artificial audit report manipulation incidents like what occurred at KPMG.

Besides, the management accountants at KPMG should keep a documented backup of audit data to refer to in case of manipulation. Recording essential business data includes recording all financial transactions in a physical book for future reference. Such a measure may be difficult since KPMG is a large company, but internal auditors could record such information on a priority basis, leaving out unnecessary details.

Importance of Ethics in Managerial Accounting

The ethics of managerial accounting has evolved, with new opportunities for fraud now becoming available. Companies tend to focus on traditional financial auditing, resulting in pilferages in such areas as performance, system, and operational audits. Cases of irregularities and mismanagement sometimes arise from these areas; hence, implementing project audits or continuous audit processes is essential. Also, the evolution of management processes and the principles of functioning of enterprises have changed how managerial accountancy and auditing take place. Instead of just focusing on financial aspects, managers consider all organizational functions, more so those that pose the highest risk.

Conclusion

KPMG internal auditors and managerial accountants violated ethical standards of accounting by manipulating internal audit reports and cheating in training tests. By manipulating the company’s internal books of accounts severally, KPMG presented a fallacious financial image to investors at the Securities Exchange Commission. Besides, reported cheating in internal training tests threatened KPMG’s auditors’ professional standards. To avoid such incidents, KPMG and other companies should deploy stringent internal review teams that can detect and prevent violations of ethical standards in managerial accountancy.

References

Stanišić, M., Spahić, N., & Tomin, M. (2019). Auditing of application controls. Revizor, 22(86), 7–18. https://doi.org/10.5937/rev1986007s

Isa, T. (2011). Impacts and losses caused by the fraudulent and manipulated financial information on economic decisions. Revista de Management Comparat       Internațional, 12(5), 929-939

Securities Exchange Commission. (2019, June 17). SEC.gov | KPMG Paying $50 Million             Penalty for Illicit Use of PCAOB Data and Cheating on Training Exams. Sec.gov.       https://www.sec.gov/news/press-release/2019-95

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Week 10 Assignment – Ethics in Managerial Accounting
Current economic conditions have tested the role of managerial accountants, challenging them to remain independent in mind and spirit when contributing to a business’s decision-making processes. Maintaining ethical standards and adherence to rules set by governing bodies at the local, state, and federal levels is needed to ensure both client and public trust.

The Role of Accounting Governing Bodies in Ensuring Ethical Standards and Fiduciary Duties for Managerial Accountants

To complete this assignment, prepare a 4–5-page paper in which you address the following:

Identify the accounting governing bodies in your state and describe their role in setting ethical behavior and the fiduciary duties of a managerial accountant.
Research the accounting industry and select a case from within the last three years in which ethical accounting standards were compromised. Describe the ethical violation(s) outlined in the case.
Propose internal controls that should have been in place to prevent an ethical violation.
After assessing the case you selected, describe how your thinking on the importance of ethics in managerial accounting has evolved over the course of this term.
Use three sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source slide at least one time within your assignment. For help with research, writing, and citation, access the library or review library guides.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course.